Jonathan Clements's Blog, page 397

Hard Earned

LOOKING BACK on my 75 years or, at least, those after age 10, I realize I have always managed to make money. I never received an allowance or lavish gifts as a child, but it never mattered. I always earned what I needed.

Let me count the ways: raking leaves, shoveling snow, lemonade stands and—my favorite—rummaging through the trash cans in a local park for soda bottles. We got 2¢ for regular size and, if lucky, 5¢ for large bottles. This was the 1950s version of recycling. I’m betting such activity would be frowned upon today by both parents and kids.

As children, we made money putting on plays and running our own carnivals with the neighborhood gang. Think The Little Rascals. We’d even allow our parents to throw a wet sponge at us for a nickel. Shining shoes with my sister was another venture. Since we lived in an apartment building, I also helped collect the garbage via a dumbwaiter each evening, shoveled coal into the furnace and carried out the ashes. Man, were those cans heavy.

When I was 13, I talked my way into a job at a local pet shop for $5 a week, plus a free tropical fish now and then. I even tried raising tropical fish to sell, but they ate their own. When I was 15, I got an afterschool job at the local library running a mimeograph machine and shelving books for 75¢ an hour. At the time, the minimum wage was $1, but I didn’t complain. I just looked for more hours to work. In between, there was selling greeting cards door to door. I still have the .22 rifle I bought with money earned from that venture.

Earning our own money seemed the right thing to do and it was mostly fun. And while I didn’t realize it at the time, there was a bit of satisfaction in what we did.

How are things different today? In 2017, children age 4 to 14 received an average $454 in allowance over the course of the year, in addition to cash gifts for birthdays and holidays. That works out to an average $8.74 a week, with 14-year-olds at an average $12.26. Meanwhile, a 2016 MarketWatch article notes that, “roughly seven in 10 parents give their children an allowance… and roughly one in four kids gets $100 or more per month.”

While some parents dole out cash for chores like taking care of a pet, doing dishes or making a bed, I see these things as a family obligation. They aren’t true work. They don’t instill a sense of entrepreneurship, independence and responsibility. There’s no success or failure involved and no dealing with a boss. You are getting paid for things you should be doing.

I have lived in my current house for 43 years. Never has a child knocked on the door and asked to rake my lawn. Only once was I asked about shoveling snow and that was more than 30 years ago.

I’m not lobbying for a return to the days of the Industrial Revolution and child labor. But I do think learning to handle money starts with learning what it takes to earn it. And when you spend the money you’ve earned, you should have to keep working to replace what you spent.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Time to Choose, Reality Check, Under Construction and Mini-Golf, Anyone. Follow Dick on Twitter @QuinnsComments.

The post Hard Earned appeared first on HumbleDollar.

Flying Solo

THE RANKS of self-employed Americans are expected to rise to 42 million by 2020. It’s easy to understand why folks flock to self-employment. These workers report higher job satisfaction and overall happiness. The downside: They need to craft a benefits package that mirrors what they lost by leaving traditional fulltime positions.

Other than health insurance, the cornerstone of any employee benefits package is the employer-sponsored retirement plan. Most often, this is a 401(k), 403(b) or similar plan. Self-employed individuals, however, will want to use a retirement account designed just for them: the solo 401(k) plan.

As a self-employed business owner, I’ve opened and funded a solo 401(k). Having been stuck with both a high-fee 401(k) plan and a low-contribution SIMPLE IRA at former employers, I was eager to open a solo 401(k), because these plans offer a slew of attractive benefits:

High contribution limits. A solo 401(k) allows self-employed individuals to maximize retirement contributions as both an employee and employer. In 2018, total annual contributions are typically capped at $55,000. This consists of either an $18,500 employee elective contribution or 100% of net business income, whichever is less. The employer contribution can be up to $36,500 or 25% of net business income, whichever is less. If you’re age 50 or older at year-end, you can make a catch-up contribution of $6,000, for a total of $61,000.

Low cost. Each financial institution that offers a solo 401(k) plan has a slightly different fee structure, but most are extremely low cost. Vanguard’s offering charges $20 annually per fund held in the plan. This fee is waived if you have total assets of more than $50,000 held at Vanguard.

Easy administration. Overall, a solo 401(k) plan is almost as easy to administer as an IRA or Roth IRA. There are no annual filing requirements for plans with less than $250,000 in assets. Once that asset level is reached, the business owner is required to file a Form 5500-EZ on an annual basis. The information required to complete the form is provided by the financial institution that oversees your plan.

Consolidating accounts. Former employer 401(k), 403(b), SEP, IRA and other retirement accounts can be rolled over into a solo 401(k). Besides simplifying your finances, this can be a huge plus if you’ve ever made—or plan to make—nondeductible contributions to an IRA.

By rolling over all IRA money, except your nondeductible contributions, into your solo 401(k), you’ll then be able to convert these nondeductible contributions to a Roth IRA and pay little or nothing in taxes. This strategy is known as the “backdoor Roth.” You can read more in HumbleDollar’s money guide.

Investment options. Gone are the days when an employer plan might be limited to high-fee actively managed funds. A solo 401(k) plan lets you manage your investments as you wish, similar to the investment choices you have with your IRA and Roth IRA.

An added bonus: Spouses who are employed by the business may also participate in the solo 401(k). This potentially increases a household’s annual contribution limit to $110,000, or $122,000 if both are age 50 or older.

Ross Menke is a certified financial planner and the founder of Lyndale Financial, a fee-only financial planning firm in Nashville, Tennessee. His previous blog was Slow Going. Ross strives to provide clear and concise advice, so his clients can achieve their life goals. Follow him on Twitter @RossVMenke.

The post Flying Solo appeared first on HumbleDollar.

Merging Money

I TIED THE KNOT again—at age 71. Four years into widowhood, I met Charlie online. Also widowed, he and I began dating cautiously, each respectful of our late spouses and those marriages, as well as our adult children and grandchildren.

We also focused on financial and legal issues. We knew from experience, and from research we had read, that financial disagreements can derail love. In an international survey of  widows and money, women shared advice about re-partnering: Talking about money matters was essential before remarriage, so as not to be blindsided later.

Here are 10 vital questions that Charlie and I used to delve into financial issues before our marriage last August. If you’re contemplating a new relationship, possibly including remarriage, these money talks may also benefit you:

How will we make decisions about money, such as spending, saving, handling debt and budgeting?
Who pays for what? Will we use, say, a joint credit card or checking account for shared expenses?
Will we live together fulltime or keep separate homes?
If we live together fulltime, whose place will we choose? Or should we move into a new home?
What are our plans for retirement? If already retired, what retirement lifestyle does each of us desire?
Will we merge our investments or hold them separately?
How will we handle it if one of us earns substantially less than the other or has fewer financial assets?
What about health issues and potential costs down the road? How will we navigate those?
What financial responsibilities are we willing to take on for our children or aging parents?
How do each of us feel about a prenuptial agreement?

Communicating honestly about money with your partner can deepen your relationship as a couple. I know it worked for Charlie and me.

Observe how your partner deals with money before you broach the subject. Where to begin? Perhaps start with, “I’ve been thinking about my financial future lately. I’d like both of us to talk about that, as we look toward our future together.”

Rather than jumping into all 10 questions right away, find a time when you’re both relaxed and undistracted. Maybe it’s after dinner on Sunday night, enjoying your favorite beverage in a quiet spot. Try to express yourself clearly and calmly, keeping your first money talk brief, preferably no more than 30 minutes. Then try another talk the following week.

You’ll learn what’s negotiable and what isn’t for both you and your partner. In certain situations, is there room for collaboration? How about an alternative approach that feels comfortable for both of you? Remember, there’s no one-size-fits-all perfect way for a couple to handle their finances.

Kathleen M. Rehl retired from financial planning in 2013 and now focuses on speaking, writing and doing research that empowers widows. She authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows . Kathleen walks an hour most days, practices gentle yoga and enjoys writing poetry. You can learn more at www.KathleenRehl.com.

The post Merging Money appeared first on HumbleDollar.

Hole Story

IS APPLE the greatest company ever? On the surface, it certainly appears that way. The company sells more than 450,000 iPhones every day. Customers love them: According to surveys, iPhone customer satisfaction stands at 98%. Last year, Apple’s revenues topped $250 billion, and in its most recent quarter the company saw profits jump 41% from a year earlier. Not surprisingly, the company’s share price reflects this success. Having gained 33% over the past year, the company recently reached $1 trillion in market value—the first company ever to achieve that milestone.

What’s not to like?

I have nothing against Apple. The iPhone is a great product. I have a lot of respect for the way CEO Tim Cook runs the company. As an investor, though, I’m not sure these numbers tell the whole story.

Yes, Apple’s profits grew by 41% over the past year. But can we accept that figure at face value? It’s worth looking under the covers. Let’s begin with a quick tour through Apple’s fourth quarter profit and loss statement. There are a few things to learn.

The starting point on a profit and loss statement is revenue. By that measure, Apple grew at a healthy 20% rate. Pre-tax profits grew a little more slowly, at 18%. But here’s where things get interesting. Somehow, Apple was able to convert that gain of 18% in pre-tax profits into an increase of 41% in after-tax earnings per share, which is the key driver of stock prices.

How did it manage that? First, Apple benefitted from the recently enacted corporate tax cut. As a result, even though profits increased by 18%, its tax bill decreased by 28%. Also as part of the new tax rules, the company was able to repatriate hundreds of billions of dollars that essentially had been stranded overseas. From this cash hoard, Apple was able to buy back more than $70 billion of its own shares. This had the effect of substantially reducing Apple’s share count, thereby increasing the profits allocated to each remaining share. Taken together, the result was a 41% increase in earnings on a per-share basis.

So what’s not to like? Apple management is doing everything they can to delight customers and shareholders alike.

The problem, in my view, can be found in a supplementary disclosure document provided by Apple. If you look at the most recent one, you’ll see that iPhone sales seem to have plateaued. While iPhone revenue grew by 29%, the number of phones sold increased only fractionally—0.5%, to be exact. In other words, virtually all of that 29% revenue increase came from higher prices. Over the past year, the average price of an iPhone has increased from about $620 to nearly $800, with several topping $1,000.

Why am I harping on this? Aren’t these price increases just more proof of Apple’s dominance, its customers’ loyalty and the immortal magic of Steve Jobs?

In some ways, yes. But I’m focusing on it because I see three cautionary lessons for individual investors:

1. Always look at the numbers behind the numbers. Whenever you’re looking at economic or financial data, don’t settle for simple summaries. Keep your hand on your wallet until you know what’s really going on.

2. Be wary of short-term data. This year, Apple benefitted from a set of unusual circumstances: a 29% price increase, a huge corporate tax cut and a onetime “amnesty” on cash repatriation that enabled gargantuan buybacks. These events are unlikely to repeat. As any high school student can tell you, you can’t draw a trend line through a single data point. Always look at long-term data before making a decision.

3. Remember that trees don’t grow to the sky. In defending the slowdown in iPhone unit sales, Tim Cook stated, “I don’t buy the view that the market is saturated.” I’m sure he’s sincere in making that statement. But I’m also sure that the CEOs of General Motors or Sears or IBM—or BlackBerry—would have said the same thing when their companies were on top of the world, just as Apple is today.

To be clear, I’m not saying that Apple is over the hill. I’m just saying it’s important to avoid loving an investment so much that you lose objectivity.

Adam M. Grossman’s previous blogs include Seeking Zero, Garbage In and All Too Human . 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 .

The post Hole Story appeared first on HumbleDollar.

Signed and Sealed

WANT A COPY of From Here to Financial Happiness signed by yours truly? It might make for an enriching holiday gift for a friend or family member—or perhaps for yourself.

Just follow this simple four-step process:

Shoot an email to Jonathan(at)JonathanClements.com specifying how many copies you want and what mailing address they should be sent to.
You’ll receive an invoice from PayPal asking for $20 per copy. That $20, which covers the book, shipping and handling, is 33% off the cover price.
Pay the invoice using a credit card, debit card or PayPal. You don’t need a PayPal account to purchase books. Your copies will be shipped once your invoice is paid.
If you want copies for Hanukkah, please pay your invoice by Nov. 15. If you want them for Christmas, please pay by Nov. 30.

The post Signed and Sealed appeared first on HumbleDollar.

October’s Hits

BUSINESS HEADLINES last month were dominated by the stock market’s daily drama. But HumbleDollar’s readers also had other things on their mind. While two of October’s best-read blogs were devoted to the stock market, five weren’t:

Jack of Hearts
Bearing Gifts
Won in Translation
When to Roth
Ignore the Signs?
403 Beware
The Other Half

Last month also saw big traffic for October’s three newsletters, A Good Life, Thinking About Money and Warning Shot, as well as for a blog from late September, Budget Busting. Overall, it was the busiest month in HumbleDollar’s brief 22-month history, with the number of page views up 141% from the same month in 2017.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness , can now be ordered from  Amazon  and Barnes & Noble .

The post October’s Hits appeared first on HumbleDollar.

Just Asking

“I DON’T KNOW.” Those may be the three toughest words for an investor to utter—and yet perhaps also the most important.

Despite the robust rebound of recent days, the S&P 500 is still down 6.5% from its September all-time high. Indeed, U.S. stocks just suffered their worst monthly loss since 2011. What should we make of the craziness? Here are five crucial unanswered questions:

1. Where are stocks headed?

As the saying goes, if you ask a stupid question, you’ll get a stupid answer. Trying to guess the stock market’s short-term direction is a mug’s game, because you’ll be wrong half the time.

What to do? Stop fretting over short-term performance and instead focus on risk—from two vantage points. First, there’s the amount of risk it’s reasonable to take based on your investment time horizon and the riskiness of your broader financial life, including whether you have a regular paycheck and how secure it is.

Second, there’s the amount of risk you can stomach. No matter how long your time horizon, you shouldn’t invest heavily in stocks if you freak out over minor market dips.

2. Has the great rotation begun?

Nobody knows the answer to this one, either. But it’s an intriguing question. Cast your mind back to the late 1990s. Growth stocks, and especially technology shares, went on a tear. Meanwhile, value stocks—those shares that are cheap relative to corporate earnings or the value of a company’s assets—were left in the dust.

But all that changed in early 2000, when the tech stock bubble burst. Over the three calendar years through year-end 2002, the Russell 3000 growth index shed a cumulative 55.1%, while the Russell 3000 value index lost just 12.4%.

Could we see a similar rotation this time around? In other words, will the laggards of recent years—not only value stocks, but also emerging stock markets and developed foreign markets—suddenly get their moment to shine, while growth stocks fall from favor? Here’s a sliver of evidence: Last month, U.S. growth stocks dropped 9.2%, while value stocks fell 5.5%, developed foreign markets 8% and emerging markets 8.7%.

Will this sort of performance gap persist? In the absence of a crystal ball, your best bet is broad diversification. My advice: If you have a lopsided portfolio that’s heavily focused on U.S. growth stocks, it would probably be wise to add some U.S. value stocks and foreign shares.

3. Are value and foreign stocks cheap?

To answer this one, I turned to money manager William Bernstein, author of The Four Pillars of Investing. “Both U.S. growth and value are definitely not cheap,” Bernstein says. But he thinks U.S. value stocks are cheap relative to growth stocks and hence priced for better performance.

“This has been the longest dry spell for U.S. value stocks ever,” Bernstein notes. “As with the stock market overall, the lion’s share of excess returns from value stocks come packaged in relatively brief periods.” Translation: When the moment arrives for value stocks to sparkle, the gains will come quickly—and those who don’t already own them could easily miss out.

Meanwhile, Bernstein deems developed foreign markets to be “fairly valued” and emerging markets to be “somewhat cheap.” In other words, it’s hard to argue that any part of the global stock market is inexpensive, except perhaps emerging markets.

Surprised? It’s true that, over the past five years, we’ve seen big performance differences among stock market sectors. But even the “losers” have posted gains over that stretch—which means screaming bargains are hard to find.

4. What do normal stock market valuations look like?

This is a question that’s tripped up many investors, both amateurs and professionals. U.S. stocks have been richly valued for much of the past three decades. Take the cyclically adjusted price-earnings ratio, otherwise known as CAPE or the Shiller P/E, which compares current share prices to average inflation-adjusted earnings for the past 10 years. Since 1990, the Shiller P/E has averaged 25.7, versus an average 15 for the 30 years prior to that. But anybody who took those rich valuations as a sell signal would have missed out on handsome gains.

There’s a host of possible reasons U.S. stocks have grown more expensive. Confronted by the stock market’s impressive long-run returns, maybe investors have overcome their historic “myopic loss aversion”—as academics have dubbed it—and are now less leery of stocks. In an ever-wealthier world where folks enjoy increasingly long lives, maybe we have too much capital chasing too few investment opportunities, coupled with a greater willingness to hold a long-term investment like stocks.

Maybe share prices have been bid up as the costs of investing—including trading spreads, commissions, fund fees and taxes—have come down. Maybe we’re more comfortable owning stocks because we have greater faith in the economy’s stability and our own financial future. After all, as bad as the 2008-09 Great Recession was, it was nothing compared to the Great Depression of the 1930s.

Whatever the reason or reasons, it seems we’re now placing a higher value on stocks. But what’s the new normal for valuations? Nobody knows. That doesn’t mean valuations aren’t important. Today’s skimpy dividend yields and lofty price-earnings ratios suggest long-run returns will likely be below their historic averages. But those rich valuations tell you nothing about where stocks are headed this year or next.

5. Will active managers shine if the downturn continues?

Very few actively managed funds beat their benchmark index. Depending on which U.S. stock fund category you look at, the percentage of funds that beat the market over the past 15 years has ranged from 1% to 17%, calculates S&P Dow Jones Indices.

Defenders of active funds contend that matters will look better in a down market. That’s certainly possible. While index funds remain fully invested at all times, active funds often keep a portion of their portfolio in cash, either to meet redemptions or as a hedge against declining stock prices.

Problem is, as of September, stock funds had just 3% of their assets in cash, according to Investment Company Institute data. That’ll provide a very modest cushion against falling share prices—but maybe not enough to give active funds a performance edge. Why not? First, active funds charge higher expenses than index funds and that’ll drag down their performance, no matter which way stocks go. Second, active funds often lean toward shares of smaller companies—and those stocks tend to get hit harder in declining markets.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness , can now be ordered from  Amazon  and Barnes & Noble . Jonathan’s most recent articles include Warning Shot, Ignore the Signs and Thinking About Money .

The post Just Asking appeared first on HumbleDollar.

Why Wait?

MY MOTHER-IN-LAW Doris passed away last year at age 90. In the last few years of her life, she often mentioned that she felt guilty spending any of her money, let alone splurging. She wanted to leave the money to her children, even when her children kept telling her to spend, splurge and enjoy the last few years of her life.

Doris didn’t want to worry about her investments. Like a lot of people, she entrusted her money to a nationally known financial company. Unfortunately, the company, like many name-brand money managers, charged an asset under management (AUM) fee above 1%, which I considered high for investing her money in relatively simple index funds. Although she had a good portion invested in stocks, the return she received after the AUM fee was much lower than the return she could have enjoyed with index funds held at a low-fee company like Charles Schwab or Vanguard Group. Doris, however, didn’t want to think about it too much and just assumed that the big name meant best management.

Result: Even though Doris thought she was saving money and doing the best for her children, she was unnecessarily wasting part of their inheritance by overpaying for money management.

After going through my mother-in-law’s passing, and the accounting and disposition of her estate, I started to think about how my husband and I could best handle our estate. I wanted to avoid or minimize Doris’s two issues: being afraid to spend our retirement money and wasting the estate by having it held by a company with high fees. When I came across M1 Finance, with its no-fee, fractional, automated investing, it struck me that I had found my solution.

We have two sons, ages 22 and 23, both recent college graduates, who have just started their first jobs. Both seem to be on track for good careers—one’s a software developer and the other’s an actuary—so they have no immediate need of financial assistance. My husband and I are 57 and 53, and we were fortunate to be able to retire early. We know we have many years ahead of us. But at the same time, we want to leave something behind for our sons.

The upshot: I front-loaded our sons’ inheritance by setting up Roth IRAs for both of them. We contributed the maximum to their accounts this year and plan to continue contributing for the next few years. We asked them not to touch the money until they reach retirement age.

Generally, I believe in owning a broadly diversified portfolio. My husband and I are invested in all the major stock market sectors, both in the U.S. and internationally, and we also own bonds. Our sons, however, are much younger, with a far longer time horizon. I decided to invest 100% in stocks, divided between exchange-traded index funds focused on U.S. and international small-cap value stocks. This has the potential to give their portfolios’ growth an added boost. Academic research suggests both small-cap stocks and value stocks tend to generate superior returns.

We stressed to them that they should continue to contribute the maximum to their employer’s 401(k) and that the Roth IRAs we set up should only be a small part of their total savings.

Front-loading their inheritance with M1 has five advantages:

We’re now free to spend our money without guilt or worry that there will be nothing left for our kids.
There’s no commission and no AUM fee, except the annual expenses charged by the ETFs we selected, so the money can grow faster.
M1 makes it easy to see when it’s time to rebalance.
Our sons shouldn’t have to pay taxes on the earnings from their Roth IRAs, provided they wait until after age 59½ to withdraw those earnings.
They can easily manage their finances, even though they aren’t savvy investors. All of this should require very little time and attention from our sons, allowing them to focus on their chosen careers.

This plan requires lots of faith and patience over several decades. While no one can control the return on the investments or how the market will perform over the decades ahead, we hope to take advantage of long-term growth and, at the very least, avoid wasting money by paying unnecessary management fees for minimal actual management.

We also hope that, by walking our sons through this process, they’ll gain the wisdom that a little oversight and using the right financial firms can make a big difference in the long run. And we won’t charge them a fee for that lesson.

Jiab Wasserman recently retired at age 53 from her job as a financial analyst at a large bank.  She and her husband, a retired high school teacher, currently live in Granada, Spain, and blog about financial and other aspects of retirement—as well as about relocating to another country—at YourThirdLife.com . Her previous blog for HumbleDollar was Won in Translation.

The post Why Wait? appeared first on HumbleDollar.

Creative Destruction

MY FIRST JOB was in 1963, at age 12, delivering newspapers for the Los Angeles Herald Examiner. There must have been at least five children from my neighborhood who were newspaper carriers. Today, you rarely see anyone delivering newspapers. The Herald Examiner went out of business in 1989.

My next job, as a teenager, was working at a machine shop that made tools for aerospace companies, such as McDonnell Douglas and Rockwell North American. The machine shop is long gone and so are many of the companies it served.

After I graduated from high school, I worked for an advertising company that made merchandise catalogs for department stores. Some of our customers were Buffums, May Company and Gottschalks. All three stores are no longer in business. Ditto for the advertising company that employed me.

When I was in college, I worked for Fedco, a regional membership department store in Southern California. It filed for bankruptcy in 1999, unable to compete with national chains such as Target and Walmart.

After college, my first job was at Hughes Aircraft Company. I worked in the Microwave Product Division that built microwave transmitters and receivers for cable television operators. The product line eventually closed down because of competition from Direct TV and new fiber optics technology.

Before I retired, I worked for a satellite company that was later sold to Boeing. It can take many years to build and launch a satellite because of the long lead times involved in the manufacturing process. As a result, by the time a satellite was launched, some of the technology was already obsolete.

Have you ever heard the phrase “creative destruction”? Joseph Schumpeter used the term in his 1942 book Capitalism, Socialism and Democracy, where he describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

The smart phone is an example of creative destruction: It destroyed the market for older cell phones, MP3 players, calculators, voice recorders, point-and-shoot cameras, personal digital assistants and wrist watches. Netflix disrupted the video rental business. It was instrumental in Blockbuster closing its 9,094 stores worldwide and filing for bankruptcy protection, proving that the “too big to fail” model doesn’t protect you from the process of creative destruction.

This relentless process explains why a significant part of my job history has been erased. The companies I was involved with, in my early life, were replaced by new companies that were more adept at producing the goods and services that society wants.

Sometimes, entire industries are turned upside down. The old coal industry is losing out to cleaner, cheaper and abundant natural gas created by the shale gas revolution. But that doesn’t mean that natural gas will be the long-term winner. Renewable wind and solar energy industries could eventually challenge natural gas.

Creative destruction also has an effect on workers. Old jobs are replaced by something new—and it isn’t necessarily new jobs: It could be new technology replacing an old job. Over the past 20 years, we have seen plenty of blue collar jobs in automotive manufacturing and customer service replaced by automation. We have already had a glimpse of the future with self-driving cars. Taxi and commercial truck drivers will inevitably be affected.

White collar jobs are also impacted. The work of pharmacists, attorneys and journalists is already being transformed by automation. Pharmacies and hospitals are using automated medication dispensing machines. Attorneys are using artificial intelligence to do document reviews. Media stories about business and politics are being written using computer algorithms.

Why is creative destruction important to an investor? It drives economic growth by creating new technology and production processes. That, in turn, results in the better products and services that are sought after by customers. This constant upheaval, with new businesses replacing old, creates a vibrant economy that should enrich investors.

Problem is, amid the gales of creative destruction, it’s hard to know which companies will survive and thrive. One indication: Among the almost 26,000 companies that have traded on the U.S. stock market over the past nine decades, just 36 were in existence for the entire period. Forget trying to guess which companies will be dominant in future. Instead, to reap the rewards of creative destruction, your best bet is own all companies—by investing in total market index funds.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include Taking Inventory, A Word of Advice, Lucky One and Friendly Reminder.

The post Creative Destruction appeared first on HumbleDollar.

Food for Thought

WHILE DINING recently at my favorite restaurant, I focused on my food order. But I also got to thinking about economic concepts—an occupational hazard for a retired academic.

Opportunity cost hit me almost immediately. When the urge to eat strikes, I cannot consume two meals at two different restaurants at the same time. By selecting “A” over “B,” I’m automatically giving up an experience at “B.” Next, once in my selected spot, I face another—often difficult—decision as to which specific meal I want. I’m often conflicted by menu choices. Opportunity cost again: As delicious as they may be, I cannot eat three or four separate meals.

Demand curves affect patrons in terms of both restaurant and menu selections. The occasion—whether it’s a first date, birthday or anniversary—can make a big difference to the acceptable price range. If you’re dealing with a special occasion, the demand curve tends to be relatively inelastic, meaning you aren’t too sensitive to the meal’s price. For other occasions, the demand curve probably ends up in the moderately elastic range.

Personally, certain entrees can have an almost perfectly inelastic demand curve. Recently, I was dining on one of my favorite foods, Royal Red Shrimp with drawn butter. For me, the demand curve for these seasonal shrimp—which have consistency and taste more like lobster—is essentially perfectly inelastic. Regardless of price, I want them. I’m able to splurge on these occasional inelastic temptations with the money I save utilizing other economic principles.

Such as? I economize by buying items where my demand curve is perfectly elastic, meaning I simply won’t buy if the price is too high. I never purchase two-liter soft drinks unless they’re priced at $1 or less per bottle. By the same token, the reduced prices on “happy hour” bar beverages and restaurant “specials” spur purchases I might otherwise not have made.

I also economize by avoiding luxury goods or (perhaps a better term) snob goods. I can easily say “no” to obscenely priced bourbon shots and $500 bottles of wine.

There are also products and services that I consider bad goods. These are things unwanted at any price. Free isn’t nearly good enough. You’d have to pay me to accept items like dark rum, salmon, liver, butter beans, eggs and overcooked steaks.

Bad goods, for me, can extend to classes of restaurants as well. It’s not unusual for me to totally reject free or discounted buffets, as well as any restaurant offering “home cooking.” I’d rather spend more money at an alternate spot of my choosing.

Restaurants frequently remind me of the concept of diminishing returns. For example, the first sips of beer are the best. Additional sips are progressively less and less rewarding. Too much beer, especially at my age, would not only be “rented,” but also would likely be regretted later. Even very good meals can quickly turn bad if one continues to eat and eat, plus throwing up at a meal’s conclusion isn’t a good way to impress one’s dinner partner.

I find that savings in some areas allow me to spend more on items of high personal value. I use coupons and senior discounts frequently. I’m fond of “happy hour” and “early bird” specials. I look for midweek specials, newspaper and magazine offers, two-for-one deals and the like. What do I do with my savings? I splurge on weekends—preferably on Royal Red Shrimp.

Dennis E. Quillen is a retired economic geographer and university professor. In addition to blackjack, he loves long-term investing. His previous blogs were Cutting the Bonds, Bouncing Back, Starting Over and Getting Comped.

The post Food for Thought appeared first on HumbleDollar.