Jonathan Clements's Blog, page 319

Learning by Doing

OUR PAST INVESTMENT errors give us strong clues about how we’ll behave in future. They also contain lessons we can put to good use.

Since I started investing, I’ve occasionally assessed my performance—but not in the traditional sense. Rather than evaluating my portfolio’s results, I’ve been pondering my response to the errors I’ve made.

My first mistake happened before I even began investing. I avoided the stock market because of fears of a potential correction. I won’t do that again.

What other errors am I guilty of? The bulk of my stock market exposure is in value-oriented actively managed funds. They have similar investment styles, so—not surprisingly—there’s some overlap in the stocks they own. That leaves me relatively undiversified. Fees are an additional issue: Some of these funds charge as much as 1.8% in annual expenses.

Aware of these shortcomings, I decided to change course in early 2020. I invested in a low-cost S&P 500-index fund—a strategy that’s likely to deliver better long-run results. That doesn’t mean I’m not worried about the index’s current level or the fact that a big chunk of the S&P 500’s earnings growth over the past five years has been driven by just six technology stocks. My plan is to slowly add stock funds exposed to other countries, as well as some bonds.

In an effort to diversify further, I also took two minor positions in a couple of crowdfunded startups. Venture capital investing has grabbed my attention in recent years. You might argue that this will be lost money—and you could be right. But I could also make 10 times my money. I feel the premium I paid for this “option” isn’t too big. An unbreakable rule I imposed on myself: I won’t allocate more than 5% of my investment money to private companies.

Even if the startups weren’t a mistake, I know I committed a big error as recently as March. As the market tumbled, I bought a fistful of individual stocks. Some are familiar names like Coca-Cola, Pinterest, Lyft, AB InBev and 3M. I even bought Norwegian Cruise Line when it traded at around $10 a share. Despite the high uncertainty surrounding the cruise business, I saw it as a reasonable bet: If things go well, maybe I could triple my money. But if that happened, I would never get rich: Precisely because of the risk involved, I didn’t invest much in the first place.

In total, I invested in about 10 different businesses, including a few small European companies. Sound like indiscriminate buying? That isn’t the worst part. What made this a bad decision is that I didn’t do the research necessary to justify investing in individual companies.

I invested in these companies merely because I’d read about them, or because they seemed reasonably priced compared to some analysts’ fair value estimates, or because they’d experienced significant market drawdowns. None of these is a good reason to invest in a stock.

What drove my buying spree? As the market fell 30%, I felt an urge to jump in. “This is a once-in-a-decade opportunity,” I said to myself. That may be true—but I hadn’t done my homework and it didn’t take long for me to start divesting my individual stocks. My broker is the only one who benefited from these transactions.

I wish there was a happy ending to this article, but I am certain I’ll keep making mistakes. How can I be so sure? For starters, I still haven’t divested all of the individual stocks I bought. But, with any luck, I’ll also keep learning—and I have a feeling there are many more lessons left for me to learn.

Marc Bisbal Arias holds a bachelor’s degree in business and economics,  and is a Level I candidate to become a Chartered Financial Analyst. He started his professional career at Morningstar, performing research and editorial tasks, and is currently employed by Dow Jones in Barcelona, Spain. Marc’s previous articles include Fear of Falling, Mind Over Money and The Upside of Down. Follow him on Twitter  @BAMarc .

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Summer Job

MANY OF US DREAM of owning a second home near the sea, a lake or the mountains. For my wife and me, that dream location was the southern New Jersey shore. We’d both spent many vacations there as children and then did the same with our own growing family. We had visions of taking grandkids to the beach and boardwalk.

In March 2012, we realized our dream by purchasing a three-bedroom condo in Ocean City, N.J. We rented out the condo for eight summers and used it ourselves for the other nine months of the year. Last September, we were presented with the opportunity to purchase a larger, four-bedroom condo on the same block, so we sold the original condo and purchased the larger place. We don’t plan to rent out the new place because we’re approaching retirement and hope to use it ourselves for a decent chunk of each year.

What did we learn from owning that first vacation home? If you’re tempted to buy a second home for both rental and personal use, here are my five recommendations:

1. Know the market. When we bought the property, it already had about half the summer weeks rented, so we kept the rates the same from the previous year. When I looked into it, I realized the rates had not been adjusted for seven years. I started to research similar properties in the area. I noticed two things: Our peak rate was lower than comparable properties and the period of peak rates was shorter than nearby rentals. In our area, the rates typically start low in June, grow to a peak in July and start to drop again in August. Over the next few years, we increased all of our weekly rates and stretched the peak season further into August.

2. Find a good management company. This is important if you don’t live close enough to take care of maintenance, cleaning and welcoming the next renters. In our area, realtors have historically played that role for a 12% commission. The benefit of a local presence is important in finding local services, like handymen and house cleaning. We used the realtors that we bought the house from and they were great. We also used them to sell the house.

Online services like Airbnb and VRBO are becoming more prevalent, but you’re on your own when the faucet leaks or, say, the air conditioning breaks on the hottest day of the summer—which happened our first summer.

3. Don’t expect to get rich. Vacation homes are often in high price markets. Your rental income will cover some of your costs, but probably not all of them, unless you’re in an area where you can rent for much of the year.

Meanwhile, in our area, overall home prices seemed to rise faster than rental rates—especially during the real estate bubble years. Rising prices also reflect extensive remodeling: There’s a strong trend toward knocking down older homes and building larger, more modern houses. The newer homes appear to command about a 20% premium over homes only 15 years older. We sold our home after seven years for about 10% more than we paid. That wasn’t a great increase, but it sold in two days without having to list it or show it, so our selling costs—and headaches—were minimal.

4. Think carefully about improvements. When a vacation home is both a rental and for personal use, there’s an inherent struggle between improvements necessary to rent the home and those which make it more enjoyable for your family. An over-improved home won’t necessarily fetch a significantly higher rent than the local market will bear.

The previous owner had done nothing to improve the house, but had still managed to fully rent it every year. We tried to strike a balance. We painted, and bought new furniture, electronics and appliances. It made it a much nicer place for us and our family, and we got lots of compliments from the renters, including many who continued renting for years. But it did nothing to raise the eventual sale price. This is not necessarily bad: You just need to recognize why you’re making the improvements and be comfortable with it.

5. Keep good records. Treating your vacation property as a second home—part rental property and part personal use, as opposed to a pure investment property—complicates the finances and taxation of the property. You get some of the tax benefits of owning a rental property, but not all. You must divide your expenses between rental use and personal use.

Detailed records are critical come tax time. I built spreadsheets to capture rental income, expenses and utilities, and kept a calendar of rental, personal and maintenance days. I tweaked the expense spreadsheet to match the categories used on Schedule E to report expenses. I used the same spreadsheets each year, which made it easy at tax time.

All this may sound complicated. But if you’re comfortable with finance and taxes, it’s very doable. I upgraded my tax software to a version that made it easier to handle rental properties. That said, in the year you sell, I recommend hiring a good tax preparer. For instance, the “depreciation recapture” caught me off guard and added a significant amount to our 2019 tax bill.

One final tip: A potentially valuable quirk of the tax code is the 14-day rule. This is a special rule if you use a vacation home as a residence and rent it for less than 15 days. In this case, you don’t report any of the rental income, but you also don’t deduct any rental expenses. Think of a second home in Pebble Beach, California, or Augusta, Georgia. You could rent it out for the annual golf tournament at top dollar and not have to declare any of the rental income. People in our area rent out their shore homes for two of the peak summer weeks—and they make enough to cover their homeowner’s insurance and real estate taxes.

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 Don’t Leave a Mess, Treasure Hunting and  Taking the Hit . Follow Rick on Twitter  @RConnor609 .

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Reading the Signs

I MISS BASEBALL. I love the strategy and the moments of excitement that come in the later innings. I also like to attend games, watching the interaction among the players and coaches. The third base coach plays a big role, relaying signals from the manager to the baserunners and the batter. If you’re a player, and you miss a signal, it can ruin the next play.

While the stock market has signals, they aren’t as black and white as those in baseball. But they’re still important. While I’m mostly a buy-and-hold investor, I follow the markets closely, keeping an eye on trends and market signals.

I truly have a passion for both fundamental and technical analysis, and I believe both have value. Indeed, providing insights to traders and investors is a key part of my day job. I even teach this stuff to college finance students, and I have nothing against those who actively manage their portfolio and pick stocks.

In fact, we all make active investment decisions, even if we aren’t choosing individual stocks and bonds. Should we overweight small caps? U.S. shares? Value stocks? Those are active decisions. Even index-fund investors make active decisions left and right.

Indeed, it’s hard to be a truly passive investor. I don’t claim to be. While I mainly stick to index funds in tax-advantaged accounts, there are indicators I monitor to get a handle on the market. What do I look at? Here are the five financial indicators I find especially useful:

1. The dollar. What happens in the currency markets affects everything. I keep tabs on the U.S. dollar index, which compares the value of the greenback to a basket of other currencies—mainly the euro, yen and pound.

If the U.S. dollar is trending up, it usually means commodities and energy stocks are underperforming. Those lower commodity prices are a plus for many U.S. corporations, which see their costs fall. The upshot: A slow and steady rise in the dollar is typically a positive economic sign.

But if the dollar rises sharply, that’s not so good—and often it’s an indicator of nervous market sentiment. Think about 2008 or the height of the market crisis this past March. During such times of panic, investors often flock to the safety of the dollar.

2. The VIX. Be warned: When the VIX is elevated, the market is going to move—a lot. What’s the VIX? It’s a measure of expected volatility in the S&P 500 over the next 30 days, based on prices in the options market.

A VIX reading of 80 means the expected daily move will be 5%, or about 1,300 points on the Dow, which is what we saw back in March. From a psychological point of view, expect the stock market’s moves to be hard to stomach. By contrast, a VIX of 12—which is what we saw in December and January—means the daily move is a more soothing 0.8% per trading day, with many sessions finishing pretty much unchanged.

3. Energy stocks vs. oil prices. Are energy stocks rallying in the face of falling oil prices? That’s precisely what the market witnessed during late March and much of April. Trading in energy company stocks tends to be forward looking, while the commodities are more in-the-moment. When oil stocks are heading higher in the face of lower energy prices, that’s a bullish signal to me—and the opposite is true as well.

4. News and the reaction to it. This trips up a lot of investors. Take the current situation: The economy is in a shambles and yet the S&P 500 has rallied strongly in recent months. Focusing simply on the latest news and economic headlines can lead you astray.

Instead, you need to follow both the news and the market’s reaction. When stocks go up on bad news, it tends to be bullish. When strong data is released and the market sells off, that’s a bearish sign. What’s the best buy signal? When you’re scared to flip on the financial news, it’s probably a good time to purchase stocks.

5. My brother’s friend. When I hear that family members and their friends are getting the itch to trade stocks on Robinhood, I get nervous about where the market may be headed. Are you seeing such naïve enthusiasm? It’s often a contrarian indicator.

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 Inflection Point, Getting Back In and Riding the Bear. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com.

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Day by Day

I’M THE TYPE of person who likes to plan. I have at least 10 to-do lists going at any one time. I have calendars on my refrigerator, my desk and my phone. I plan out my days, my months, my years and, on occasion, my decades.

My job, managing the biology department at a small liberal arts college, is a perfect fit for my personality. For the past 22 years, I’ve methodically planned out every day of each semester. I figure out what equipment is needed to run the laboratory courses we teach. I anticipate how much money the department will require for the upcoming fiscal year. I try to foresee the future and avert any mishaps that could cause the department to operate in a suboptimal fashion.

In February, I spent some time working on my annual performance review. I combed through my past evaluations and reread some of the comments made by co-workers. They praised my resourcefulness and my efficiency, and they admired my ability to simultaneously balance routine tasks with crisis intervention. I felt valued for the work I was doing. I was secure knowing that I’d found my career niche and my future was bright.

Then everything changed.

In a matter of days, I went from being an indispensable member of our department to being deemed “nonessential.” The lecture halls and laboratory spaces in the biology building—usually overflowing with activity—went silent. The college went from a vibrant community of students, staff and faculty to a ghost campus.

The economic impact of the coronavirus pandemic has hit many colleges and universities hard. Almost immediately after schools began to shutter their campuses in March, talk of layoffs and furloughs began. The college I work at has continued to pay its staff and faculty throughout the pandemic. We have, however, been warned financial losses could accumulate quickly if the campus remains closed to students. Administrators have already notified staff members about salary freezes and departmental budget cuts.

The college will soon announce the type of teaching model to be used in the fall. But questions will still remain. How many students will return to campus if the school is open? How many student employees will we have? If there’s a coronavirus outbreak on campus, will the doors close again as abruptly as they did a few months ago?

My husband is fond of the saying, “Hope for the best, plan for the worst.” I hope the furloughs, layoffs, salary reductions and suspension of retirement account contributions that other institutions are putting into place won’t happen at my college. At 53 years old, I’m too young for retirement but too set in my ways to want a new career.

The good news? All that planning I did in the past will help me weather any storm I might face. My husband and I have an emergency fund we can tap into. We have a stable income stream thanks to his pension and Social Security benefits. And a permanent job loss could mean accelerating our plans to relocate to another part of the country.

Kristine Hayes is a departmental manager at a small, liberal arts college. Her previous articles include Did It Myself, While at Home and Attitude Adjustment . Kristine enjoys competitive pistol shooting and hanging out with her husband and their dogs.

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Fed Up

LAST WEEK, I talked about some of the unsettling trends in the financial markets. In that article, I focused on the role of brokers and day traders, and noted that it takes two to tango. But it turns out the dance floor is quite a bit more crowded than that.

Yes, brokers and day traders are doing their part, but there’s another set of actors who are less visible but a whole lot more influential. As you ponder your investments, I think it’s important to understand who they are and the role they’re playing.

A while back, I was in an Uber. The driver began to share some of his views. Among other things, he said the Federal Reserve was privately owned by the Rothschild family of Europe. While this sounds crazy—and it is—it also turns out to be a widespread conspiracy theory. One of the reasons for that, I think, is that the Fed is unique. Both its role and structure aren’t easy to understand. But it’s important to try because, acting behind the scenes, the Fed’s impact is significant—and not always positive.

The Federal Reserve’s mandate is twofold: to minimize unemployment when the economy is weak and minimize inflation when the economy is strong. To accomplish these objectives, the Fed has several unique tools at its disposal. Primary among them are the ability to influence interest rates and to effectively print money. In my view, the Fed has gone off the rails in its use of both tools.

Interest rates. Because the Fed governs the rate at which banks lend to one another—known as the federal funds rate—it ends up indirectly controlling all other interest rates. This is an important lever because low rates spur economic activity. Whether it’s an individual buying a car or a house, or a company buying equipment, lower rates drive economic activity.

Historically, in normal times, the federal funds rate has averaged about 5%. During the 2008 financial crisis, however, the Fed took the unprecedented step of dropping the rate to nearly zero. It remained near zero until 2015, after the economy had regained a healthy footing. Between 2015 and 2019, the Fed raised rates, but only gradually. As a result, when the coronavirus hit, the federal funds rate was still only in the 2% to 3% range. This left Fed governors no choice but to drop the rate back down to zero, which is where it stands today.

Don’t get me wrong. I’m glad that the Fed acted quickly to lower rates this year. The problem: It had been too timid in raising rates earlier and, as a result, found itself boxed in. Rates were already so low that it had little room to maneuver, unless it opted to go below zero—which is the odd situation today in parts of Europe.

Printing money. In late March, as stocks plummeted, the Fed announced a set of additional policies to stimulate the economy. Not coincidentally, the day it made this announcement was the day that the stock market turned around and began the fastest recovery on record. Here’s what Fed Chair Jerome Powell said at the time: “[W]e’re not going to run out of ammunition, that doesn’t happen. We still have policy room in other dimensions to support the economy.”

What exactly did he mean by “policy room in other dimensions”? He was talking about printing money. While the Fed doesn’t technically print money—that’s the job of the Treasury—it has the power to create money out of thin air. Like God dropping dollars into people’s bank accounts, the Fed can and does create money, using it to buy investment assets to help stimulate the economy.

What’s wrong with these policies? Aren’t zero rates and printing money great for everyone? My concern is that these policies distort economic behavior. We’ve seen it in the past. We’re seeing more of it this year, and I worry that it will continue as long as these policies persist. Here are four areas where the impact seems most pronounced:

1. Individual investors. Low rates make bonds less attractive to investors, causing them to scratch around for alternatives. Low bond yields cause some investors to pursue riskier kinds of bonds, while it prompts others to decamp from bonds entirely in favor of stocks, where dividends today can be higher than bond yields. Either way, these low rates are coercing investors into riskier investments.

2. Stocks. It may surprise you to know that Apple, which earned $55 billion in profits last year, borrows money. In fact, it has more than $100 billion of debt. Why would Apple borrow? In my view, it’s because of super-low rates, compliments of the Fed.

What does Apple do with all this borrowed money? In large part, it uses the money to buy back its own stock, which helps drive the stock higher. Over the past four quarters, Apple has repurchased $73 billion of its own shares. And Apple isn’t alone. Many companies pursue this strategy. The result is that the Fed’s policy of rock-bottom rates has been driving the stock market higher—artificially, in my opinion.

3. Consumers. Basic economics states that printing money will ultimately cause inflation. But inflation has been historically low over the past decade, causing some people to ask whether this traditional relationship no longer applies.

This has even given birth to a way of thinking called Modern Monetary Theory (MMT), which postulates—in simple terms—that the government can and should print as much money as it wants as long as it doesn’t cause inflation. An MMT proponent, in fact, recently published a book called The Deficit Myth. Not surprisingly, MMT has gained adherents on both sides of the aisle in Washington, because it says that there’s no longer a tradeoff between cutting taxes and social spending. It’s a politician’s dream.

There’s just one problem: MMT is premised on the observation that inflation has been low for many years, despite Fed policies that should have been inflationary. But as my actuary friend Ross points out, the reality is that there has indeed been inflation—lots of it. It’s right under our nose. It just hasn’t shown up in the official figures because it’s impacted prices unevenly. Just look, however, at the price of homes or college tuition. In fact, anything that can be purchased on credit has seen prices go through the roof. That’s because it’s been so cheap to borrow. While the MMT crowd might think deficits don’t matter, consumer debt definitely does. In short, the Fed’s low-rate policies have put consumers deeply in debt.

4. Inflation and the federal debt. The federal debt had already been on a dangerous trajectory when the coronavirus hit. Together with this year’s stimulus spending, it’s at an unspeakable level. According to MMT proponents, we shouldn’t worry. But the data on which their theory rests is awfully thin.

The author of The Deficit Myth, for example, points to Japan as a case study. Japan has pursued policies similar to the Fed’s and has also experienced low inflation. But it isn’t conclusive to point to one other country in one single time period. The author also overlooks the concept of a tipping point. What if inflation is low for now, but something triggers it down the road? If inflation and interest rates head higher in the future, we’ll all be looking at paychecks that don’t go as far or at tax rates that are higher, and perhaps both.

What’s the solution to all this? Unfortunately, there is no magic bullet, and that’s part of the problem. It’s forcing investors to choose between lower yields and higher risk, with not a lot of great alternatives. Still, the only and best path, in my view, is to maintain a simple, low-cost, diversified portfolio. Rebalance consistently and look for ways to protect yourself from higher taxes down the road. Most of all, don’t feel coerced into chasing hot stocks or higher-yielding, higher-risk investments. Instead, stay the course with a sensible portfolio—and hopefully, over time, good sense will again take hold in Washington.

Adam M. Grossman’s previous articles include Two Reasons to Worry, Too Slow and Sticking With It.  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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15 Ways to Happy

WE DON’T PURSUE money just to put food on the table and a roof over our head. Instead, the hope is to enhance our life. On that score, it seems we aren’t doing terribly well: Our reported level of happiness is no higher than it was half a century ago.

Could we do better? I believe so. There’s been extensive research on happiness in recent decades. For those who want to dig into the details, you can find a great summary here. Want the Reader’s Digest version? These 15 steps could help your happiness:

1. Build wealth. Those with more income and greater wealth typically report higher levels of happiness, though there remains much debate about the precise relationship. Does the impact of money on happiness cap out at some income level? Does more money really improve day-to-day happiness—or only when we think about our standing relative to others? Whatever the case, money seems to help, so go ahead and save a little more. Your future self will thank you.

2. Avoid comparisons. While those with great wealth may get a warm glow when they ponder their bank balance, the rest of us need to tread more carefully: We may feel discontent with our lot in life if we know others have more. This is a reason to avoid living in a town where we’ll have rich neighbors, to skip restaurants we can’t really afford and to steer clear of salary discussions at the office.

3. Invest in friendship. Regularly seeing friends can give a big boost to happiness. Similarly, marriage seems to be a plus for happiness. But it appears divorce also helps, while widowhood can be devastating.

4. Get religion. Those who are religious tend to report higher levels of happiness, though the connection seems to be strongest among those with lower incomes or who live in less prosperous countries.

5. Work on your health. There’s some evidence that we adapt, at least in part, to debilitating medical conditions. Still, those in good health often report higher levels of happiness. Indeed, it appears to be a virtuous circle: Healthier people are happier—and happier people are more likely to take care of their health.

6. Pursue your passions. We get great pleasure from working hard at something we’re passionate about and that we feel is important, whether it’s at home, in the community or at the office. The pleasure lies less in achieving our goals and more in making progress toward them. Again, there seems to be a virtuous circle: Fulfilling work can boost happiness—and happy workers tend to be more productive.

7. Favor experiences over possessions. This is perhaps the insight from happiness research that’s received the greatest attention. But even if we should devote more dollars to experiences, we all end up purchasing some possessions. The key: Think twice about possessions that’ll involve ongoing hassles. We’re talking about things like the big yard and the second home, both of which can involve substantial maintenance. Meanwhile, we should favor possessions that help us to socialize and to have fun experiences—which, of course, might lead us to conclude that the big yard and the second home aren’t so bad.

8. Pay to avoid distasteful tasks. Rather than trying to buy happiness, we might spend money to avoid unhappiness. Don’t like cleaning the house or mowing the lawn? We should consider hiring somebody to do these things for us.

9. Cut your commute. We like to feel in control—but that’s tough to do if we have a long commute, with the potential for traffic jams, roadworks, and delayed trains and buses. Want to boost happiness? Try moving closer to work.

10. Give back. We tend to think we’ll get greater happiness from spending on ourselves, rather than on others. But research suggests otherwise. We should be generous with friends and family, give regularly to charity—and also give our time, by volunteering to help causes that we think are important.

11. Make smaller purchases. Just because something costs 10 times more doesn’t mean we’ll get 10 times the happiness. The lesson: We’ll likely get greater happiness from many small purchases, rather than one big one.

12. Plan ahead. Often, the best part of a purchase or experience is the anticipation, as we look forward to having the kitchen remodeled or getting away for a week. Want more happiness from these expenditures? Make plans far ahead of time.

13. Focus on the positive. I know, I know, this sounds like some cliché from a self-help book. But in terms of our happiness, what matters is what we focus on—so we should strive to ignore irritations and instead zero in on the good parts of each day.

14. Express gratitude. We often quickly adapt to material improvements, while also forgetting the fun experiences we’ve had. To counteract this tendency, we should pause occasionally to think about the friends and family who surround us, the possessions we’ve accumulated and the wonderful experiences we’ve enjoyed.

15. Minimize money worries. Money has the potential to buy happiness. But if we spend recklessly and end up financially stressed, our efforts will likely backfire. Indeed, it seems that—if we pay ahead of time—we often enjoy experiences more, because we aren’t thinking about the cost. This notion also applies to retirement: Those with predictable income that covers much of their living costs, whether it’s from a pension, Social Security, immediate annuities or elsewhere, appear to have happier retirements.

What doesn’t make the above list? Children. I mention this reluctantly, because it’ll probably get me hate mail. But the research suggests that raising children doesn’t help happiness. Obviously, we’re biologically wired to want children—and, once we have adult children and then grandchildren, our growing family can be a source of great joy. But getting there can be rough.

Latest Articles

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

“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.”
Even if you’re divorced, you may be eligible for Social Security spousal or survivor benefits based on your ex-spouse’s earnings history. James McGlynn explains the rules.
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….
What happens if you underweight countries that don’t respect the rights of citizens and investors? You end up with a very different sort of emerging markets fund, as Bill Ehart discovered.
“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.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Keep Your Distance, Breaking the Rules and In Our Own Way.

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It Took Decades

IF YOU’VE WORKED a lifetime—while prudently saving and investing—so that in old age you’re well off financially, should you feel guilty?

If your retirement income is greater than the income of most American families, including those still raising young children and facing college costs, as well as the cost of their own retirement, is that embarrassing?

A few years back, during a discussion about how people spend, save and invest, my son-in-law—who’s a financial advisor to high net worth families—casually said to me, “You’re wealthy.” What? Me wealthy? I’m not even close to qualifying as one of his clients. I was shocked by the comment.

Had I completely lost perspective? I’m well aware of the data on Americans’ income, net worth and savings rates. Rather, I think my shock reflects the fact that my road to wealth (I still cringe at that word) has been a long one. I started work at age 18, retired at 67 and have continued to collect investment gains in the 10 years since. My wealth isn’t that out of line with the average—meaning the mean, not the median—for Americans in my age group.

I suspect many seniors have been on a similar long journey—“long” being the operative word. When I listen to some millennials talk, I get the impression they believe us old folks rolled out of bed at age 18, instantly found financial success and that the road to where we are today was without potholes and bumps.

Half of my investment wealth is the 401(k) balance I’ve accumulated since 1982. Another chunk is my former employer’s stock, which I amassed over my career of nearly 50 years by taking advantage of the company’s stock purchase plan and reinvesting dividends.

What about the rest? Much of it was accumulated in the years after sending our four children to college—a decade of high costs that ended in 1998. Those were the lean years, when I worked fulltime, while running a small side business just to get by.

A big portion of my net worth is real estate. Some of that came from living in a modest home for 44 years that we purchased for $59,000 and recently sold for $505,000. The proceeds allow us to live in our current condo mortgage-free. I also bought a vacation home 33 years ago for $159,000, which I rented most of the summer to help pay the mortgage. It’s now valued at $425,000. In retirement, I drive a luxury car—my one frivolous purchase. But in my defense, I saved for more than a decade, so I could pay cash for it at age 70.

I have friends and relatives who have not done as well, partly because of life choices and partly because of misfortune beyond their control. Should that cause me guilt?

This wealth accumulation thing meant tradeoffs—in how I spent my time, and how my wife and I spent our money: working 12 or more hours a day, many times on weekends, and avoiding excess spending, because saving money always came first. In the 55-plus condo community where we now live, many of the residents retired after selling businesses that they owned for many years—another road to wealth—but where the decades of effort is often overlooked by those who envy the end result.

I have two financial goals left: to be sure my wife can maintain her lifestyle should she be on her own and to leave as much money as possible to my four children. Some people will disagree with that second goal. But I view it as an obligation.

Indeed, the accumulation of even modest wealth comes with obligations. As I see it, if you can, you should help with the grandchildren’s college, support your children if they run into temporary financial difficulties, and donate to charities and local volunteer organizations. If you can, you should also be generous in mundane ways, such as leaving large tips.

Back to the original question: Should those of us with accumulated wealth feel guilty for a lifetime of saving and investing? I still struggle with the question. But I know one thing for sure: Those of us with wealth (there’s that word again) should be grateful for our good fortune—financially and otherwise—even if we worked for what we have.

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

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Did It Myself

I PURCHASED my first house almost 30 years ago. To call it a “fixer” would have been an understatement. It was 800 square feet of neglected space in desperate need of repairs and updating. Being fresh out of college and working at a job that paid less than $20,000 a year, I didn’t have a lot of money to spend on improvements. But I had the energy and enthusiasm of youth.

Over a five-year period, I learned how to hang sheetrock. I figured out how to tear shingles off a roof. I became educated in how to run electrical wire, fix water leaks and refinish hardwood floors. Even though there were days when I wished I could have hired someone to complete a project, I was confident my sweat equity would pay off. 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.

My continuing education in renovation and remodeling has been going on for three decades now. I’ve owned four homes so far and each has provided me with the opportunity to increase my knowledge. I’ve learned—often through trial and error—what I can and can’t do. All that experience has provided me with a wealth of tips for other home improvement wannabes:

Give yourself plenty of time. If the vendor of a home improvement product tells you a project should take four hours to complete, double the estimate. If it’s a project you’ve never attempted before, consider tripling the number. Be sure to factor in the possibility of having to make multiple trips to the local home improvement warehouse store to purchase miscellaneous items you hadn’t anticipated needing.

Evaluate your return on investment. When it comes to necessary repairs, such as fixing a leaking toilet, your return on investment isn’t likely to factor into your decision to proceed. But when it comes to upgrading your living space, it’s important to ponder what will pay off in the long run. Painting is an inexpensive way to dramatically change the look of a room. It’s also a project most people feel comfortable attempting. Assuming you stick with a palette of neutral colors, it’s probably the single most cost effective way to add value to a home

Know your limits. I recently paid to have a fence built. I knew that, between the slope of the land and the tree roots that were present, it was a project beyond my skill level. I was, however, not hesitant to tear down the old fence. The contractor who built the new fence was happy to haul away the debris and charged me less for the project since he didn’t have to spend time doing the demolition work.

Find local specialty retailers. Big box home improvement stores are great for a lot of things, but for some projects smaller is better. When the shower valve in our guest bathroom failed, I went to a local plumbing supply store. I whipped out my cell phone and showed a photo of the fixture to the salespeople. They immediately recognized the brand and the model—and, $27 later, I had all the parts to repair it. They also recommended a particular YouTube video to learn how to perform the repair. With those warmups completed, the project was done half an hour later. I figured I saved at least $150 by not hiring a plumber.

Have the right tools. Tools make a huge difference in how smoothly any project will go. They also add to the cost. Renting, rather than buying, expensive power tools can pay off if you don’t plan on doing frequent home improvement projects. On the other hand, if you’re bitten by the home improvement bug, purchasing a set of quality tools is likely the way to go.

I’ve learned that, in the tool world, new doesn’t necessarily equate to better. I recently inherited a set of professional grade power tools from an electrical contractor. Even though the tools had been used for several years, the quality was considerably better than the consumer grade items I already owned. Craigslist and Facebook Marketplace are often good places to go hunting.

Educate yourself. Books, online courses and home improvement magazines are all great ways to learn the basics of repairs and remodeling. And don’t overlook the usefulness of videos provided by retail stores and on YouTube. Many provide step-by-step instructions for a variety of common home repairs.

Kristine Hayes is a departmental manager at a small, liberal arts college. Her previous articles include While at Home, Attitude Adjustment and  Few Absolutes . Kristine enjoys competitive pistol shooting and hanging out with her husband and their dogs.

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Sunny Prospects

“NICE OFFICES,” offered the 30-something investor, as he cast a wary eye across the corporate art, barren desks and empty bookshelves.

“Yeah, we asked management if they could put us on the 12th floor, so our suite number could be 12b-1. Funny, right?” The financial salesman winked.

“Not sure I get it.”

“It’s a joke, but clients never get it, they pay it.”

“What qualifications do you have?”

“See those initials after my name? You wouldn’t believe how much they cost.”

“Are you a fiduciary?”

“I always act in my best interest.”

“What about my best interest?”

“Only if it’s suitable. So what can I help you with?”

“I have an IRA and I’m trying to figure out how to invest it.”

“We’ll definitely want to put a variable annuity in there.”

“Why?”

“The variable annuity will give you tax-deferred growth.”

“But doesn’t the IRA already give me tax-deferred growth?”

“You can never be too careful. Look at what happened to the Titanic.”

“Huh?”

“That’s why we also like private REITs. Have you seen how much volatility there is in publicly traded REIT stock prices? That just isn’t an issue with private REITs.”

“I keep reading about index funds.”

“Those financial writers. Bunch of commies. Buying an index fund is like mooching off welfare. We prefer cash-value life insurance.”

“Why’s that?”

“Retirement is America’s most pressing financial issue. By selling these policies, I show my commitment to my family’s retirement.”

“How much do you charge?”

“That depends on whether you’re buying, selling or sitting still.”

“Should I be sitting still?”

“Don’t you want to see some action? The early bird gets the commission and all that. By the way, get a load of these A shares. We like ‘em a lot.”

“Are you a fee-only advisor?”

“Oh no, not fee-only. I like to diversify. You should, too. Have you thought about an equity-indexed annuity?”

“What’s that?

“It’ll turn you into a long-term investor. Once you’re in one of those suckers, you wouldn’t dare sell, after you see the exit fees.”

“Sorry, I’m a little confused.”

“Really? That’s great. Must be time to sign some paperwork.”

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Keep Your Distance, Breaking the Rules and In Our Own Way.

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Your 10-Year Reward

IF YOU’RE MARRIED, filing for Social Security can be confusing. But there’s one group who has it even worse—those who are divorced.

In recent weeks, I’ve had a number of conversations with women who had no idea that they were even eligible for spousal benefits based on their ex-husband’s earnings record. (I also recently watched the television show Dirty John: The Betty Broderick Story, which gave completely erroneous advice on benefits for ex-spouses.) My hope: Someone reading this may learn that he or she is eligible for spousal or survivor benefits from an ex-spouse.

A divorced spouse is eligible for Social Security spousal benefits if he or she was married for 10 years or more. Period. Being married for only nine-and-a-half years doesn’t cut it. Every divorce lawyer in the country should be aware that it’s worth delaying a divorce, so the marriage officially lasts at least 10 years.

There are other mistakes and misconceptions among those who are divorced. The ex-spouse isn’t informed that you’re filing. The ex-spouse can’t prevent you from filing. As long as you’ve been divorced for more than two years, you’re aged 62 or older and your ex-spouse is at least age 62, you would be eligible for Social Security spousal benefits, as long as the marriage lasted 10-plus years.

There are also misconceptions about when to file for spousal benefits. Unlike filing for Social Security benefits based on your own earnings record, where it often pays to delay to age 70, there’s no advantage to delaying spousal benefits beyond your full retirement age, which is age 66 or 67, depending on the year you were born. If you’re planning to receive only spousal benefits, because the benefit based on your own earnings record is modest, you shouldn’t wait to age 70, but rather file no later than your full retirement age.

It doesn’t matter if your ex-husband or ex-wife has remarried. Filing for spousal benefits doesn’t reduce benefits for his or her new spouse. If you have remarried, however, you can’t file for spousal benefits based on your ex-spouse’s earnings record. Instead, you’d be eligible based on your new spouse’s earnings record.

This brings me to another common mistake that can be costly—and it has to do with survivor benefits. Spousal benefits are benefits for when the spouse or ex-spouse is alive. Survivor benefits are benefits for when the spouse or ex-spouse is deceased. For those who are divorced, Social Security has different eligibility rules for survivor benefits.

If you remarry before age 60, you aren’t eligible for survivor benefits based on your ex-spouse’s earnings record. But if you remarry after age 60, but your earlier marriage had lasted 10-plus years, you should have the option to receive a survivor benefit from either your current spouse or your ex-spouse. Just as every divorce lawyer should be aware that a marriage needs to last 10 years to be eligible for spousal or survivor benefits, every engaged couple should be aware that if they’re marrying in their late 50s, they might want to wait to age 60 to be eligible for survivor benefits based on an ex-spouse’s earnings record.

The bottom line: Keep in mind four crucial rules. First, if you were married at least 10 years, you might be eligible for spousal or survivor benefits. Second, if you’re divorcing, you might want to make sure your marriage lasts at least 10 years. Third, if you’re remarrying, you might want to wait until age 60. And finally, if you’re filing for spousal benefits, there’s no advantage to delaying beyond your full retirement age.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles include Four Simple Tips, Filling the Gap and Four Opportunities.

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