Jonathan Clements's Blog, page 404

markets.WSJ.com

IF THERE’S ONE FINANCIAL WEBSITE I visit more than any other, it’s markets.WSJ.com. Before the stock market opens, I’ll look to see whether the S&P 500 futures indicate shares are headed higher or lower. During the trading day, I’ll check occasionally to see where things stand with stocks—and, if there’s been a big move, I’ll scour news sites to see what might be driving it.

But markets.WSJ.com doesn’t just offer a snapshot of the financial markets. It also allows visitors to gauge valuations. Want to play armchair market strategist, especially at this time of market turmoil? Many key numbers can be found on the website’s home page, but some require burrowing into the site. Here’s what I look at:

The S&P 500’s dividend yield and price-earnings ratio. Today, the S&P 500 companies are collectively yielding 1.9%, versus a 50-year average of 2.9%, and they’re trading at more than 25 times reported earnings, compared with the 19.2 average for the past 50 years. The site also includes the P/E based on predicted operating earnings. I don’t pay much attention to that figure, because it’s skewed lower by overly optimistic forecasts from Wall Street analysts.
How 10-year inflation-indexed Treasurys compare to 10-year Treasury notes. You need to dig into the site to find the yield on inflation bonds. Meanwhile, the 10-year Treasury note yield is on the home page, with the yield for other maturities found elsewhere. Right now, 10-year inflation-indexed Treasurys are yielding almost 0.8 percentage point more than inflation, while 10-year Treasurys are paying 2.9%. The difference—somewhat above 2.1 percentage points—represents investors’ collective expectation for annual inflation over the next 10 years.
What high-yield junk bonds are yielding relative to Treasurys. The site has details on a variety of high-yield indexes, but I usually look at the Merrill Lynch high-yield index included under the “U.S. Corporate Debt” category. Right now, it shows junk bonds yielding less than 3.5 percentage points more than Treasurys—not much of a cushion, given the risk of default.
Where the dollar is trading relative to the euro. Today, it costs $1.22 to buy a euro, versus $1.06 a year ago. When the dollar weakens, I know it’s good for the value of my foreign-stock funds—but not so good for my next trip abroad.
The interest rate on 30-year fixed-rate mortgages. You can find this by scrolling down the home page. Lately, mortgage rates have been climbing along with other interest rates, which is hurting housing affordability.
Where gold stands. I have a modest position in a gold stock mutual fund. But mostly, I look because, if gold is up, it may mean that investors are either skittish about the dollar—or skittish about the world in general.

To supplement what I learn from markets.WSJ.com, I turn to a host of other sites. Yale University economics professor Robert Shiller offers a great spreadsheet with the latest cyclically adjusted price-earnings ratio, plus a bounty of historical earnings, dividend and other financial information. From Shiller’s online data page, click on the link labelled “U.S. Stock Markets 1871-Present and CAPE Ratio.”

Meanwhile, I turn to StarCapital.de for information on international stock market valuations, NAREIT for data on real estate investment trusts, Barron’s for money market fund yields and Bankrate.com for yields on certificates of deposit. To see how different parts of the global market are faring year-to-date, I’ll visit Vanguard.com and check results for its various index funds. And when the days are dull, there’s always Coindesk.com, which offers the chance to gasp over the latest price for bitcoin.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Rendering Unto Caesar

MANY OF MY CLIENTS ARE FREELANCERS who are legally required to make estimated tax payments. I remind them that the IRS takes a dim view of freelancers, self-employed individuals and others who miss deadlines for making those quarterly payments. Miss just one, says the IRS, and it might exact a sizable, nondeductible penalty.

Who are in the IRS’s crosshairs? Individuals who receive income from sources not subject to withholding and whose tax liability exceeds $1,000, including any self-employment tax. Folks in the following categories are particularly at risk:

Freelancers and other self-employed persons who operate businesses or professions as sole proprietorships, in partnerships with others or as independent contractors.
Investors who receive interest, dividends, and capital gains from sales of investments and the like.
Property owners who receive rents or royalties.
Retirees who opt not to have tax withheld from pension payments, Social Security benefits or withdrawals from tax-deferred retirement plans.
Recipients of alimony payments.

This year’s first deadline for estimated tax payments is April 17. (The 15th falls on a Sunday and the 16th is a legal holiday in Washington, DC. When the usual due dates fall on a Saturday, Sunday or state legal holiday, they’re extended until the next weekday.)

The other deadlines for the 2018 tax year are June 15, Sept. 17 (the 15th falls on a Saturday) and Jan. 15, 2019. The IRS allows individuals to skip January’s payment, provided they submit their 1040 forms and pay their tax in full by Feb. 1.

Suppose you moonlight as a writer and have a fulltime job elsewhere. You’re not excused from making estimated payments just because you’re a part-timer.

There is, however, an IRS-approved way to avoid making those estimated payments on your writing income: You could file a revised W-4 with your employer and increase the income tax withheld from your regular paycheck. This maneuver works when 2018’s withholding is enough to cover the taxes on your salary and on your writing.

Be mindful that the IRS imposes penalties for failing to pay sufficient tax during the year through withholding or estimated payments, as well as for failure to pay required installments on time. It matters not that your final estimated payments are sufficient to erase any balance due when you submit 2018’s 1040 form in early 2019.

Suppose you’re in danger of being penalized for making insufficient estimated payments throughout the year. Will the IRS forget about penalties for underpayments in the three previous quarters if you pay the shortfall through an increase in your last quarterly estimated payment? No, that won’t work.

What does work, however, is making up the shortfall through increased withholding from wages (or from sources such as Social Security benefits, pensions and money removed from tax-deferred retirement plans) toward the end of the year.

The IRS allocates withholding equally over each of the four payment periods. Consequently, boosting withholding can retroactively lessen or eliminate penalties when a similar increase in an estimated payment might not.

What if you underpay your federal taxes by more than $1,000—and you’re potentially facing penalties? You may be able to sidestep the penalty if 2018’s combined estimated and withheld taxes equal at least 90% of the actual taxes you owe for 2018—or, alternatively, if the taxes you paid over the course of year equal 100% of 2017’s total tax liability. Let’s say your tax liability is $12,000 for 2017 and your estimated payments are $12,000 for 2018. With those kinds of numbers, you’re home free, no matter how much you owe when you file for 2018.

Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Check Him Out, The Last Word and Lost Items. This article is excerpted from Julian Block’s Year-Round Tax Savings, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

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This Week/Feb. 25-March 3

PUT RETIREMENT FIRST. Are you socking away at least 12% of your pretax income toward retirement, including any matching contribution to your employer’s retirement plan? To amass enough for retirement, you may need to throttle back other financial ambitions, including the size of the house you buy and how much you help your kids with college costs.

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Subsidize Me

ARE YOU GETTING RICH off your neighbors—or are they mooching off you? You might imagine your financial success, or lack thereof, rests squarely on your own shoulders. But much also hinges on the behavior of your fellow citizens.

In numerous financial situations, one group in society effectively subsidizes another. Much of the time, you want to be the recipient of the subsidy—but not always. Consider seven examples:

Spenders subsidize those who save prodigious amounts. The profligate keep the economy humming along, ensuring plenty of jobs and healthy GDP growth. We savers reap the reward, as the strong economy keeps us employed, while also driving up the price of the investments we buy.
Active investors subsidize those who index. As our overconfident neighbors try—usually without success—to pick market-beating investments, they keep the market reasonably efficient and liquid, allowing us indexers to collect the market’s return while incurring minimal investment costs.
Those who carry credit card balances and pay late fees subsidize those of us who make money off our credit cards, by collecting handsome credit card rewards while never carrying a balance. What if the financially sloppy got their act together, paid on time and paid off their balances? Credit card companies would be forced to slash the rewards they offer—and we freeloaders would collect less.
Those of us without insurance claims subsidize those whose cars get clocked, whose homes burn down and who need major medical care. But in these cases, we should be happy to pay the subsidy. Policyholders with claims often suffer physical distress and have their lives disrupted, plus they may have to pay a deductible and face higher insurance premiums down the road.
When it comes to Social Security, traditional employer pensions and income annuities, those who die young subsidize those who live long lives.
The reverse is true of life insurance: Those who live long lives subsidize the beneficiaries of policyholders who die young. Still, given a choice, I suspect most owners of life insurance would prefer to pay the subsidy, rather than have their family receive it.
Those who let their life insurance lapse effectively subsidize those who keep paying their premiums. The cost of both term and cash-value life insurance is front-loaded, with policyholders paying more in the early years than their mortality risk justifies. This, however, doesn’t mean you should hang onto life insurance for as long as possible. If your family would be okay financially if you died tomorrow, you may want to let your policy lapse.

When insurance companies set premiums, they’re often banking on some policyholders doing just that. In the case of long-term-care insurance, however, the lapse rate has proven far lower than insurers had expected. Result: There’s been less “wasted” premium dollars from lapsed policies to subsidize the policyholders who stick around. This has been a key reason behind the sharp increase in premiums on existing long-term-care policies.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Bogleheads.org

MY INTEREST IN PERSONAL FINANCE began during a road trip five years ago. Driving alone, in a desolate part of the state, my choice of radio stations was limited. Desperate to find something other than static to listen to, I punched the “seek” button and came across Dave Ramsey’s radio show.

As someone who has always tried to live within or below my means, I appreciated his “beans and rice, rice and beans” philosophy. Ramsey’s advice was straightforward and easy to understand, even for someone like me, who didn’t have a clue how mutual funds differed from municipal bonds.

When I returned home, I checked out a variety of investing books from my local library. Many were too advanced for me to understand completely the first time through but, with time, I slowly began to decipher the language of personal finance and investing. I also began to investigate several personal finance websites, seeking advice on subjects ranging from early retirement strategies to how to maximize Social Security benefits.

Last year, I came across the Bogleheads forum. The tagline on the forum homepage is, “Investing Advice Inspired by John Bogle.” During my quest to educate myself about various financial subjects, I’d frequently come across references to Bogle, primarily related to his role in founding Vanguard Group. The forum homepage includes links to several webpages describing the basic Boglehead philosophy of investing. I quickly became intrigued.

When I started browsing the forum, I was intimidated by what I saw. The list of abbreviations alone was, no pun intended, mindboggling. ETF, REIT and TSP were just a few of the cryptic abbreviations I’d see while browsing topics. I vowed to keep reading and deciphering. Now, nearly a year later, I feel like the forum has helped me to become significantly more financially literate.

The Bogleheads forum is divided into six main categories, the most popular being “Investing—Help with Personal Investments.” People who post in this category share all the details of their financial life—salary, savings and investments. They seek advice from other forum members about potential investments, asset allocation and what percentage of their salary to dedicate to various financial goals.

FIRE (Financial Independence/Retire Early) is a subject that shows up frequently on the forum. Recently, one post focused on the question of early retirement withdrawal rates. Forum members quickly weighed in on the subject, offering links to blogs about early retirement, debating the logic of various withdrawal strategies and sharing their personal experiences.

Another forum user wanted to know how much money someone would need to stop worrying. Responders to the post offered formulas (25 to 50 times your current annual expenditures) and absolute amounts ($4 million), as well as the more straightforward answer, “Worries never go away.”

A recent addition to the forum is the Post Your Financial Milestone Announcements page. It can be both intimidating and inspiring to read stories of people who, at relatively young ages, already have six-figure incomes and seven-figure retirement nest eggs. Forum members use the page to boast about retirement account balances, as well as to brag about other financial life milestones, such as paying off their mortgages.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Oregon. Her previous blogs include USAFacts.org, Perking Up and  Aiming High .

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On the Other Hand

I LOVE THE QUESTIONS THAT KIDS ASK. This week, my first grader told me he had heard the word “caricature” and wanted to know what it meant. I explained it and then we went online to see some examples. In our highly politicized culture, we didn’t have to look far to see some exaggerated cartoon depictions of various political leaders.

It occurred to me, though, that our posture toward investments isn’t all that different. Oftentimes, financial commentators take a similarly one-dimensional, overly simplified view of things. The past several weeks have been a case in point. First, in response to a government economic report, stocks dropped 10% through Feb. 8. Then, in response to no news in particular, the market began to rebound and has since regained roughly half of what it had previously lost.

What will happen next? Turn on the TV and you will hear opinions of every stripe. On one side, an esteemed, Nobel Prize-winning economist will tell you that the market is at 1920s-like highs. Others, however, will tell you that the new policies in Washington could drive the market higher for years. If you find all this a little disconcerting, keep these three notions in mind:

1. What financial commentators say is incomplete. Putting aside the impossibility of being able to predict the future, no person ever has all of the current data. As a result, every opinion you hear from pundits is necessarily an overly simplified story, based on the information they have or are choosing to cite. The fact is, if you’re in the business of giving your opinion, you are more likely to burnish your reputation if you cherry-pick one piece of data and make a strong statement based on it, rather going on TV and honestly admitting, “Gee, I really don’t know.”

2. Many commentators want you to react. Take, for example, those polished brokerage firm analysts who frequently appear on TV. What is their role? They speak and publish regularly in an effort to get you thinking about your investments, with the hope that you will decide to make a trade—ideally through their firm.

3. What you hear won’t necessarily help. A classic 1987 study proved the detrimental effects of the media on individuals’ financial decisions. Psychologist Paul Andreassen created a simulated stock market environment and examined people’s trading behavior under two different conditions. One group was provided with daily price quotes for a group of stocks. The other group was provided with the same price quotes, but was also provided with news headlines about those companies. Result? The test subjects who received the news headlines traded more and made less.

Adam M. Grossman’s previous blogs include Five Ways to Diversify , Headlines and Head Games, and Five Steps to a Better 401(k) . 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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Simple but Not Easy

WHEN I FIRST BEGAN INVESTING 16 years ago, I threw a bunch of investments at a wall to see what would stick. Someone I respected encouraged me to invest in master limited partnerships, so I purchased a few companies. I had no real idea what an MLP was or did. Sure, I spent some time surfing the net. But that was about it.

Fast forward one year to tax time. I had lost money and had no idea I had to file with the IRS for an extension, as I awaited the arrival of the Schedule K-1 tax forms from the companies. Why did I purchase them in the first place? This became the moment when my naiveté hit me. Clearly, I needed a plan, not a hodgepodge of investments.

Since passing the Certified Financial Planner exam and working for a large registered investment advisor, I’ve had the privilege of interacting with numerous clients. Their questions and concerns, coupled with my time spent in financial planning and investment management, have changed my views in many ways. Today, these are four of my core beliefs:

1. Keep it simple. No one wants to review a 50-page financial plan. No one. Part of the creativity in financial planning is distilling a client’s goals down to what’s important and manageable. People are more responsive and successful tackling financial goals when the necessary steps are served up in smaller doses.

2. Don’t get sold. When we first meet clients, we see so many broken portfolios. Leveraged exchanged-traded funds (ETFs). Concentrated holdings. Expensive active funds. Variable annuities. We’ve yet to encounter a client who went knowingly into these products or who later had no regrets.

In most instances, these purchases reflect a persuasive salesperson, rather than the investment’s inherent appeal. Take a recent innovation: inverse volatility ETFs. During the recent market hiccup, their value fell to near zero and at least one fund provider decided to close its fund.

3. Let the plan work. I couldn’t tell you what my daily investment balances are. I don’t look at my monthly account statements. This is because I have a solid plan that already accounts for days like we’ve seen recently. We take the same approach with clients, knowing there will be good days and bad days. The focus is on what has been proven to work reliably over the long-term.

4. Control what you can. We can’t control or time the markets. No one has a copy of tomorrow’s newspaper. But we can control our asset allocation, how often we trade, what we pay for our investments and how disciplined we are. The harsh truth: Index funds outperform more than 80% of hardworking, intelligent, active Wall Street managers.

Taking action, for the sake of doing something, doesn’t build wealth. Adhering to a sound plan—and focusing on what we can control—ultimately enriches us the most, while also allowing more time for the important things in life. To be sure, this approach may seem simple. But as we’ve witnessed in recent weeks, it certainly isn’t easy.

Anika Hedstrom’s previous blogs include Betting on Me, Along Came Sheila and Gold Dust . Anika is a financial planner with  Vista Capital Partners  in Portland, Oregon. The views expressed here are her own and not those of her employer. Follow Anika on Twitter @AnikaHedstrom .

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Investors Have Spoken

THE MARKET IS ALWAYS RIGHT. It may have a different opinion tomorrow—perhaps radically different—but that doesn’t mean current prices aren’t the right ones.

Holler all you want that the stock market ought to be far lower. I do a fair amount of that myself (though the shouting is more akin to grumpy mumbling). But whether we like today’s share prices or not, they reflect the collective wisdom of all investors—and, if we want to buy or sell, they’re the prices we have to trade at.

That brings me to the S&P 500’s 10.2% nine-day market swoon and subsequent 5.9% six-day recovery. Around the world, every investor—amateur and professional—got a wakeup call over the past three weeks. They had a chance to contemplate today’s rich stock market valuations, rising bond yields and the potential resurgence of inflation. All of those worries received a thorough airing. Investors’ collective response: We’re happy to continue holding stocks at current prices, even though the S&P 500 companies yield just 1.8% and trade at 24.9 times reported earnings.

Are investors idiots? I think not. Quite the contrary: I believe it’s foolish to assume other investors are fools. Throughout my three-decade investing career, pundits have regularly argued that stocks are overvalued, and they have been dead wrong. Prices have—with the exception of a few relatively brief periods—remained elevated the entire time.

These lofty valuations are, I contend, bad news for long-run returns. Stocks will continue to kick off dividends and share prices may rise along with growth in earnings per share. But we can’t reasonably expect price-earnings multiples to climb in future the way they have in the past. That’s why I expect stocks to return just 6% a year over the past decade, while inflation runs at 2%.

But there’s a big difference between expecting modest long-run returns and predicting an almighty short-term crash. We will, no doubt, have occasional 20% or 30% market declines. But if there’s any message from the past 30 years—and from the past three weeks—it is this: We will likely never go back to the world of the 50s, 60s and 70s, when dividend yields averaged 4% and price-earnings multiples averaged 14.

It’s hard to imagine we’ll ever have another decade with average valuations at those levels. In an increasingly wealthy world, where many have extra cash to invest and harbor fewer fears about their own financial future, stocks are likely to remain richly priced. Are you sitting in cash, waiting for shares to return to historically cheap valuations? I fear it will be an awfully long wait.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . Check out his four earlier blogs about 2018’s market hiccup: The Morning After ,  Taking Stock , Speculating on Speculation and Tales to Be Told.

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This Week/Feb. 18-24

GET A WILL. Less than half of U.S. adults have a will. Without one, many of your assets will be distributed according to state law, plus you won’t have a say in who becomes your children’s guardian. Some folks don’t bother with a will, because they have a revocable living trust. But when you die, there’ll inevitably be assets outside the trust—and, for them, you need a will.

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Tales to Be Told

IF THIS TURNS OUT TO BE a major bear market, there will be a slew of articles to be written. It’s the negative correlation enjoyed by every financial writer: Even as our portfolios shrink, our potential for pontification soars.

But what if the market bounces back? It’s almost too painful to contemplate. Think of all the articles that won’t get written. If the past week’s rally continues, here are 10 stories that will have to wait for the next market downturn:

1. Don’t panic. To be sure, many of us ink-stained wretches—both here at HumbleDollar and elsewhere—have already churned out the ritual “keep calm and carry on” articles. It’s an underappreciated art form: You strive to sound intelligent as you warn that stocks could easily full much further—or, for that matter, go right back up.

2. Time to rebalance. This one is best written when stocks are off at least 20%. But deadlines are deadlines. We have to write something this week, so we’ll probably trot it out when the market is down a mere 11%.

3. She called it. There’s always some Wall Streeter—not necessarily female—who mutters “crash” before the crash occurs or, better still, actually moves clients’ money out of stocks and into Treasury bills. Our new goddess of market timing is swiftly hoisted onto a pedestal and thereafter her every pronouncement parsed by adoring investors, until her lack of clairvoyance becomes too obvious to ignore.

4. Lemons into lemonade. Without the fruit metaphor, no story on taking tax losses is complete. As share prices sink further and year-end approaches, readers will be reminded of the silver lining—that realized capital losses can be used to offset realized capital gains and up to $3,000 in ordinary income.

5. Underwater overseas. With U.S. stocks down 25%, xenophobic pundits will note that foreign stocks are even more wretched, down 29%. Where’s the diversification in that? The often-huge difference in 10-year returns between U.S. and foreign stocks is, of course, too inconvenient a fact to mention.

6. Active managers triumph. Index funds aim to keep their cash holdings to a minimum, so they track their target index as closely as possible. Actively managed stock funds often keep 3% or more in cash, so they can easily pay off departing shareholders and have money to put to work in new investment ideas.

The unsurprising result—that active funds often fall a little less during market declines—will be hailed as a sign that the long-awaited revival of active management has begun. Further signs will not be forthcoming.

7. Time to rebalance (again). Okay, we ran this story before. But this time, we really mean it. Cue the hate mail.

8. Off target. After months of searching, an intrepid financial writer tracks down an investor who is shocked—shocked!—to discover his target-retirement fund has gone down in value. How could something so sensible, offering broad stock and bond market diversification in a single package, be allowed to become the default investment option in many 401(k) plans?

The financial writer’s day is complete when a publicity-hungry congressman fires off a press release demanding Capitol Hill hearings. The congressman’s demand is met with widespread indifference from more sensible colleagues.

9. Conversion therapy. Otherwise known as “lemons into lemonade (part II),” writers urge investors to take advantage of the depressed stock market by converting their traditional IRA to a Roth. With share prices down sharply, the resulting tax bill would be similarly shrunken. Shell-shocked investors shake off their paralysis just long enough to send the writers yet more hate mail.

10. It’s a bear trap. Share prices begin their long climb back to new highs. Every step of the way, some ink-stained wretch strikes a literary pose of world-weary sophistication—and warns ominously that the good times won’t last.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . Check out his three earlier blogs about 2018’s market decline: The Morning After, Taking Stock and Speculating on Speculation. Also listen to his recent podcast with Steve Chen of NewRetirement.com.

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