Jonathan Clements's Blog, page 74
June 27, 2024
Brooklyn Bungle
"IS THAT INDIA or something? Where was that picture taken, Richie?"
“You’ll never guess, Stevie. Remember 266 Washington Avenue?”
“That brown brick, 114-unit apartment building in Brooklyn that Grandpa bought 75 years ago? Mommy said he saved for the down payment with money from the kosher butcher shop he opened after he got here from Poland. But didn’t we sell it in the 1970s? It looks like the Taj Mahal now.”
“Yeah, it’s obviously been spectacularly upgraded over the years.”
“How did you get the picture?”
“Robin and I were in New York last month and went to see it. I’ve never forgotten those days.”
“You were so close to Daddy and so involved with the family real estate business.”
“No kidding. I went to law school near home, while you drove your Corvette out to Colorado to study Freud and the Rorschach inkblots.”
“Ha, ha. But you’re right, Richie, I didn’t have a clue about the business. Let’s face it, you were the good son and I was the renegade.”
“That was a crazy time for all of us. Daddy was wheeling and dealing.”
“Richie, you know I’ve been writing about the virtues and pitfalls of investing in real estate for HumbleDollar. I’d like to be clearer about what’s made me so conflicted about it. I’m hooked by the potential for large profits, but turned off by how it can stress you out, gobble up your time and pose moral dilemmas. Not a lawyer and given to anxiety, I’ve scrupulously avoided encounters with big-money predators. I’ll bet you’ve seen a lot of confrontations from your time in the trenches. Anything that would give readers a taste of what it was like?”
“Sure, let’s start with Washington Avenue because it was a real humdinger.”
“Great, but what happened?”
Big bungle in Brooklyn. “This story has been retold in my brain since the year after I got out of law school. Stevie, we just missed becoming a big player. Brooklyn has been completely gentrified since those days. When we sold the Washington Avenue building, we agreed to carry the mortgage ourselves but the buyer defaulted. Instead of allowing him to catch up, I orchestrated a foreclosure proceeding because I knew the building had appreciated beyond the balance of the loan. The people who owed us the money then made an inadequate back payment and I refused their request to terminate the foreclosure auction.”
Richie continued: “We made a competitive offer for the building but were surprised to find out that a hastily formed group of investors bid more aggressively and got the apartment building. We offered an amount equivalent to $10,000 for each of the 114 units but they bid $12,000. Even so, we walked away with something substantial. Stevie, since then, the value of the building has benefited mightily from improvements, inflation, compounding and Brooklyn’s pervasive gentrification. According to Realtor.com, the recent median selling price of an apartment unit in the area is over $600,000. Incredibly, the valuation of that austere 114-unit apartment building, bought with savings from a kosher butcher shop by our immigrant grandfather 75 years ago, can be conservatively estimated at $30 million.”
Mayhem in Manhattan. “When Daddy had his stroke and lost some of his critical thinking ability, we still owed $250,000 on the mortgage held by the seller’s firm on our 37th Street property,” recalls Richie. “After the seller started foreclosure proceedings against us, I advised Daddy to stop making payments, and delay all expenditures and improvements. I then informed the company’s attorney that the seller would be accountable for all expenses and be left with an empty building after we vacated. The seller didn’t want to pour more money into the building and sold the mortgage back to us for under $40,000. But Daddy’s judgment was impaired by his stroke. Over my objections, he soon let the building go for a modest profit.”
Zero percent. “Stevie, remember when interest rates went nuts in 1981? Mortgages were over 16%, the highest in our lifetime. Would-be buyers couldn’t qualify and developers desperately needed cash to pay down bridge loans near 20%. They had to unload fast and a few actually offered to dump inventory by carrying the mortgage themselves at 0%. We got some condos in Florida that way. I had to get a seat on the governing board of the homeowners’ association to make sure our ability to rent the condos wouldn’t be restricted. We made a nice profit when we sold several years later, plus we built up a ton of equity because there was no interest owed and so 100% of our loan payments went to principal.”
Betrayed or beloved? “Richie, I’ve got to ask you something. Didn’t you feel betrayed when Daddy sold all the properties after his stroke? You were groomed to take over and your specialty was real estate law. I was appalled he didn’t give you anything extra in the will for all you did. That’s why I gave you my half of the house.”
“I’m not bitter at all. I never took a penny for what I did and, you know what, I have no regrets. Remember Rich-Steve Realty? How many fathers put their kids’ names on their business when the kids are still in elementary school?”
“I know, Richie. He paid for my education, he paid for my sports cars and he paid for my therapy when I was deep in depression. I get it now, but it’s taken a lifetime. He never rejected me. I rejected him.”
Keeping it real. Truth be told, I’ve never been able to shake the family obsession with real estate ownership, and my wife Alberta and I have had to contend with our share of deadbeat renters and leaky roofs. But we never sought the limelight or had to dodge the sticky moral questions raised when skirmishing with the big boys. My brother has successfully renovated numerous commercial properties. Meanwhile, Alberta and I are a mom-and-pop team with no employees and a smattering of small residential income properties around the city.
Will our children become the family’s fourth generation of private real estate investors? Richie’s three kids have moved elsewhere and are busy building their own careers, and my son Ryan’s strengths and interests are better-suited to hassle-free real estate investment trusts and the mathematical challenges of the stock market. Ultimately, our family’s history of real estate investing will likely end up when my death and that of Richie allows the family to step up the cost basis on our various properties, thus eliminating the embedded capital gains and allowing the properties to be sold tax-free.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.
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June 26, 2024
Digging Out
I conducted a credit-card debt-reduction workshop for Sally. Here's a glimpse at her finances:
Her Mastercard balance was $12,970 at a hefty 17% interest rate.
Despite that, she had an exceptional credit score of 820.
She also had a $26,000 emergency fund.
Sally was stuck in a cycle of paying just the minimum on her credit card, barely making a dent in the principal amount. Together, we crafted a two-part plan.
First, we moved Sally's card balance to a zero-interest credit card with a 21-month promotional period, albeit with a 3% transfer fee. This move was a game-changer, offering a window of opportunity to chip away at the debt without the burden of accumulating interest.
Second, Sally committed to redirecting $1,000 a month toward the zero-interest credit card. This accelerated repayment plan meant she could bid adieu to her credit card debt in just over a year.
Why didn’t Sally use her emergency savings to wipe out the debt immediately? That was tempting. But by keeping her emergency fund intact and opting for the balance transfer strategy instead, Sally could potentially earn more in annual interest than the transfer fee she'd incur, plus she still had money set aside for emergencies. As part of all this, Sally shifted her emergency fund to a money market account yielding 5%. That allowed her to earn $1,300 a year in interest.
Sally is now focused on paying off the zero-interest credit card debt and not accumulating any new credit card debt.
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June 25, 2024
Not That Person
WHAT DO WE MEAN BY an “enjoyable” retirement?
I suspect there are as many answers as there are retirees. But one thing remains a constant: the need for an adequate income. Given a choice, I don’t think many people would choose to live a frugal, barely financially sufficient retirement.
My father retired at age 66. I say “retired,” but the reality is one day the owner called him into the office and said he was no longer needed. My father loved his job selling cars and had done it for decades. The next day, the owner called my father, literally crying over what he’d done, but he didn’t change his decision.
To say my parents weren’t prepared for retirement is an understatement. There was no pension or retirement plan. They had $30,000 in a checking account, plus some shares worth $2,625. Their sole income was Social Security. They survived financially because my sister and her family lived with them and shared expenses, including the mortgage.
Did they enjoy retirement? They never complained. But they also did next to nothing—no travel, no entertainment except playing cards every Saturday night with my aunt and uncle. My father died at age 78 from emphysema and heart disease, the result of years of heavy smoking. My mother died 17 years later, at age 87, her body riddled with cancer that she never mentioned to anyone, including a doctor, until we forcibly took her for treatment when she could no longer stand the pain. Despite my request, a doctor told her she had cancer. She died the next day.
During my career, I spent many years helping retired employees with their retiree benefits. I also received hundreds of letters from retirees begging for a cost-of-living adjustment to their pension. Those letters had an impact on me.
My views on saving and retirement income are clearly influenced by my parents and by my experiences.
In the years immediately before I retired, I had no target retirement date and certainly no notion of retiring before age 65. I didn’t plan to travel or relocate or even downsize. But I did think about income. Frankly, based on the stories I’d heard from our company’s retirees and the unions who represented them, I think I was afraid of not having sufficient income for the rest of my and Connie’s life. That may have been illogical, given that I have a pension which—when combined with our Social Security—is equal to my job’s base salary. But it doesn’t seem illogical to me, not even today after 14 years in retirement.
I didn’t want anything to change after I retired, and I certainly didn’t want our financial situation to force me to make changes. I often read that, upon retirement, living expenses decline because there’s no longer a mortgage, commuting costs or any need to save for retirement. But while that’s clearly the situation with others, it wasn’t our situation: We were already used to living without a mortgage payment and I had no commuting costs because I had a company car.
What about saving for retirement? Because I knew I’d have a pension, there was no need to save huge sums every year for retirement. I saved 10% of my pay in the 401(k), though the percentage was lower during the 10 years we were paying our four children’s college costs.
There’s no doubt that, absent my pension, our lifestyle before and after retirement would have been very different. That makes it hard for me to understand how others manage to retire in their 50s on savings alone. Because of my pension, we never had to save like that, so we were used to living on a bigger percentage of my salary.
Moreover, the 10% going into the 401(k) was easily offset with our retirement’s increased discretionary spending, mostly on travel. In retirement, our annual health insurance premiums have also increased many times over, so today they cost the two of us $16,515 a year. Meanwhile, inflation has eroded the buying power of my pension. Indeed, inflation alone makes me wonder about the long-term viability of a very early retirement.
I was recently told I need such a high retirement income because I had to maintain our “sumptuously rich,” “luxurious” lifestyle. I acknowledge nearly everything about me isn’t typical for my age, including income, net worth and my views on many things. But we don’t live lavishly. In New Jersey, where we live, many teachers have a six-figure income.
I do want to maintain the lifestyle from my working years. I don’t want to be in the position of cutting back out of necessity. I make no apology for having the resources and desire to help my children when they hit a financial bump, temporary or otherwise.
Some people are super-savers during their working years, including many HumbleDollar readers. That makes a lower income in retirement less of a shock, but it’s hardly typical of the broader population. As of 2023, the U.S. personal savings rate was 4.5%.
I can’t buy into the ability to save 30% to 50% of income. Retiring in your 50s is outside my reality. Even with a pension, retiring before I did at age 67 wasn’t possible for me—not with four children to raise, put through college and pay for their weddings.
According to the Bureau of Labor Statistics, as reported by Yahoo Finance, the average income of someone 65 and older in 2021 was $55,335, while average expenses were $52,141. To me, this suggests little financial flexibility during retirement, especially for those without a mortgage-free home. In fact, I find it a bit scary.
Everyone has different priorities. For some people, maybe spending will decrease in retirement, there will be no major financial emergencies, inflation will be modest, the quiet life is just right, and being able to retire early is worth the sacrifices involved.
I’m just not that person.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on X @QuinnsComments and check out his earlier articles.
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Hitting Reset
MY WIFE AND I TOOK a hiking trip last fall that included wandering through the foothills of the Ozark Mountains in Arkansas. The leaves were just starting to change colors, something I so badly miss living here in Texas.
I returned exhausted and sore, yet mentally energized and invigorated. For the majority of the trip, we were untethered from technology: no cellphone service during the day, no newspapers or TV distractions, no political talking heads, and no e-mails requiring an immediate response.
My rejuvenated mental state was partly due to the physical exertion, but also partly the result of escaping the constant deluge of news, financial and otherwise. You see, I’m a closet financial information junkie. Not a day goes by without checking the Dow’s and Nasdaq’s movements, looking for the best rates on certificates of deposit, or wondering when the Federal Reserve will lower interest rates.
One of my favorite websites is finviz.com, a financial market visualization website. I check market data regularly and tabulate my net worth weekly. I rationalize my “need to know” as an effort to check that our portfolio really can sustain us through a 40-year retirement.
Admittedly, even I find my behavior odd, especially since I don’t own any individual stocks. I have a plan in place, as described in earlier HumbleDollar articles. I contributed religiously to retirement accounts during my working years, stick to my investment strategy, and rebalance once or twice a year to my set asset allocation. My portfolio is predominantly comprised of a Boglehead-like mix of Vanguard stock and bond mutual funds. I also have a sprinkling of cash equivalents to help us weather retirement until we start Social Security. My mantra leans toward set it and then don’t mess with it.
But as I see it, that doesn’t mean I can’t keep an eye on what’s happening in the wider financial world. I don’t watch the financial talking heads, and I’m rarely distracted by click-bait money articles. I chuckle when buddies discuss the latest hot stock or investing trend, and I get a kick when I hear people declare that they regularly beat the market. I’m content to simply match the market, accept my winnings, and let others swing for the fences. Still, that doesn’t mean I don’t peek daily at stock and fund prices, market trends and movements, and financial press releases.
The upshot: I decided to undergo a mental reset. I vowed not to look at markets or investment prices for 30 days.
Lord knows I tried. The first day was easy. I set my phone screen-side down to alleviate distractions. I only read the opinion section of The New York Times. I tuned into the evening news late to avoid the market wrap-up report. I went to sleep that evening a happy camper, confident I could meet this self-imposed 30-day challenge.
The next day was more challenging. The U.S. jobs report was released, and I was curious how this might influence the short-term rates set at the next Federal Reserve meeting. I took a deep breath, listened to tunes on Spotify and kept my cool.
The third day was fine—until I woke up. Habits die hard. I sat down with my morning cup of Joe and opened my iPad. Muscle memory took over. Without a second thought, I placed a quick tap on a Safari bookmark to check changes in the 7-day yield of Vanguard Group’s money market settlement fund (symbol: VMFXX). Oops. My cat-like reflexes enabled me to hit the home button and look away before the page fully loaded.
Of course, the next open tab was set for HumbleDollar's homepage. I was truly grateful that the exchange-traded fund price ticker was gone from the top of the page. But the news’ siren call remained strong, and I knew that it would be best not to surf my usual sites this morning. Perhaps I’d spend the rest of the day gardening.
The fourth day was abysmal. I had a doctor’s appointment and, naturally, the doctor was delayed due to an unscheduled patient procedure. I was stuck in the waiting area for 45 minutes longer than anticipated. The only seat available was directly across from the muted TV, with yet another insidious stock ticker scrolling across the bottom of the screen. Curses. For a moment, I actually wished I was at the optometrist getting my pupils dilated. I concentrated on playing solitaire on my phone, a game I loathe.
My stress level and blood pressure were elevated, clear manifestations of withdrawal. I gave up my quest on the fifth day, knowing with certainty my cardiologist would approve the decision. My self-enforced abstinence didn’t seem worth the mental effort. After a moment of self-reflection, I realized there are worse follies than feeling shackled to the world’s economic pulse.
I tried to feel a modicum of success by acknowledging I reached 15% of my 30-day goal. Author James Clear detailed in Atomic Habits how behavioral changes are more successful when done in small steps. I’ll consider breaking my goal into smaller pieces, such as checking financial news only once a week or updating my spreadsheets less frequently.
Change can be hard, but I’ll try—though it might be easier to simply take more camping trips outside of cellphone tower range.
Jeffrey K. Actor, PhD, was a professor at a major medical school in Houston for more than 25 years, serving as an academic researcher with interests in how immune responses function to fight pathogenic diseases. Jeff’s retirement goals are to write short science fiction stories, volunteer in the community and spend time in his garden. Check out his earlier articles.
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June 24, 2024
We Drive, They Spy
YOUR CAR IS TALKING to your insurance company. You aren’t part of the conversation. Suddenly, though, your insurance premium shoots up 50%. Welcome to the brave new world where your car is spying on you.
In one instance, a Florida resident drove his Cadillac around a racetrack during a special event. His insurance subsequently skyrocketed—by $5,000 a year.
Has artificial intelligence taken over? No, but automobile companies have, and without our knowing it. Carmakers are spying on drivers and passengers, and peddling the findings to car insurance companies and other buyers. About half will share information with law enforcement agencies that request it.
The Mozilla Foundation, a nonprofit that works against mass surveillance, tested 25 car brands. All 25 failed the foundation’s minimum privacy standards. Modern cars were found to be snooping on us using onboard cameras, sensors and microphones. Some even monitored phone calls. Where the occupants were going and how fast they were driving were routinely disclosed.
Of all the carmakers, Nissan was deemed the worst privacy offender by Mozilla. The carmaker even collected data about the sexual activity, genetics and health diagnoses of its customers. No, Mozilla didn’t say how the car company obtained all that information. Clearly, though, Nissan went beyond in-car monitoring in its intelligence gathering.
The daily newsletter The Morning Brew reported the curious case of a wrecked Tesla that was sold to someone in Ukraine, who proceeded to use the former owner’s Spotify account. The old owner struggled to disconnect the new driver from his account.
A reporter for The New York Times wrote a lengthy article about being spied on by her Chevy Bolt. She and her husband discovered they’d agreed to something called “connected access.” Except they hadn’t. Their Chevy salesperson enrolled them in OnStar, claiming he does this automatically with all customers, even though a GM spokesperson told the reporter this isn’t permitted.
How could this have happened to a reporter who claims she is “on the lookout for creepy data collection”? The obscure permission, which sounded innocuous, got checked by the salesman amid a flurry of document signing during the sales process.
What could the reporter do to stop the spying? GM said to “disable all data collection” by calling OnStar’s customer service line.
What might we do to prevent things like this from happening to us? Morning Brew suggests drivers may want to be “more cautious about synching data from their phones onto their cars” because carmakers may be eavesdropping. The Mozilla Foundation concluded that consumers have so little control over carmakers’ monitoring that only new government regulation can stop the spying.
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After All These Years
JEFF, DAVE, JERRY, Glenn, John, the ElderBeerMen, and then Jeff again. Experts say a robust social network is crucial to a happy retirement. My life’s journey has revolved around a handful of friends who begin and end with the same good dude.
I was a 15-year-old kid who didn’t like school, and I had the grades to prove it. I did, however, have two burning desires. I couldn’t wait to turn 16 so that, one, I could get my first job and, two, buy my first car. My dad helped me land a job at the local supermarket as a bag boy, where I ate up every hour the manager would give me. I saved up and bought my first car, a sweet 1967 Cougar XR-7.
Two years later, when I graduated high school, the supermarket boss put me in the beverage department, where I dealt with all the vendors delivering beer, wine and soft drinks.
Jeff. A driver for 7-Up, Jeff was a few years older than me. We hit it off right away. He got me a job with his employer and later asked me to be in his wedding. I didn’t stay at 7-Up very long. Meanwhile, Jeff ended up working for corporate, eventually moving out of the area, and finally owning a small chain of supermarkets down south. Though I lost touch with Jeff some 45 years ago, and haven’t seen him since, the ripples created by our friendship continue to enrich my life to this day.
Dave. In addition to nice cars, we boomer kids loved our big stereos. This was the 1970s. Dave owned a high-end stereo store. I first went to the store with Jeff, who was looking to purchase a stereo. I ended up buying all my gear from Dave.
Dave and I became friends, and I even ended up working for him in the evenings after finishing my day job. To this day, Dave and I meet every month for lunch.
Jerry. It was still the 1970s. By this time, I was selling beer and Jerry worked for Coke. We shared many of the same customers and became friends. I got Jerry a job with me at the Budweiser distributer. Jerry later got his friend Glenn a job, and he became my friend as well. I suppose you could say that, if Jeff hadn’t got me a job, and I hadn’t got Jerry a job, Glenn wouldn’t have got his job.
Glenn. In addition to selling and delivering beer, I also served as the local union president. I needed a new shop steward. Glenn stepped up and did a tremendous job. I would soon appoint Glenn to our bargaining committee.
John. Fast forward to the late 1980s. I had been at the beer company for about 10 years when we got a new hire named John, a tough, hardworking Irish kid who’d previously worked for Pepsi in another city. It turned out that John’s family had history with the labor movement.
His dad’s name was Red, and Red was the president of the 6,000-member local glassworkers’ union in Rossford, Ohio, part of Toledo. John soon became the newest member of my team. Anyone who’s been at the bargaining table will tell you negotiating contracts is no walk in the park. The experience has kept us close to this day.
The ElderBeerMen. I left the beer business 22 years ago, but remain close with a lot of the guys. John retired a couple years ago and now owns a great little bar in Rossford. These days, I blast out a text to three dozen of my former coworkers, saying whoever’s available on the first Wednesday of the month should meet for lunch at John’s bar, Red’s Irish Goodbye, which is named after his dad. I call it the “First Wednesday meeting of the Council of ElderBeerMen.”
What the heck does any of this have to do with my long-lost buddy Jeff, the guy who got me that first job? About a year ago, the ElderBeerMen were at lunch. I was telling a story about a long-ago canoe trip I’d been on with my long-lost buddy Jeff, who I knew back in my 7-Up days. John, who I’ve known now for some 30 years, stopped me mid-story and said to me, “Smitty, Jeff is my brother-in-law.”
“Holy crap, John, I was in your sister’s wedding.”
It turns out that Jeff also got John his first job in the beverage business. After that epiphany, neither John nor I really thought about this coincidence until just the other day.
Last week, I went to Red’s twice. The first time was with my old friend Dave from the audio store. I introduced Dave and John, and the three of us had lunch. The next day, I walked into Red’s for the monthly lunch with the ElderBeerMen. John was there, but at a separate table talking to some women.
After about an hour, one of the retirees at our table directed a comment toward John, about him ignoring us in favor of the girls. John growled back that he was with his sister, who was visiting from Florida.
“Not your sister Claudia,” I shouted.
“Yep,” John answered.
John’s sister, who also happens to be Jeff’s wife, was now looking my way with that “who the heck are you look” on her face. I told her that I was in her wedding. “I’m Dan Smith,” I said smiling, and we had a great little reunion.
None of these longtime friendships that now enrich my retirement would exist had I not met Jeff more than 50 years ago. The ElderBeerMen lunches probably wouldn’t be a thing. I’m now looking forward to spending some time with Jeff and Claudia during their next trip north.
In the meantime, if anyone wants to look me up, I’ll be at Red’s eating the best darn patty melt you’ve ever tasted and sipping on an ice-cold beer, while I ponder the friendly currents that landed me on this sunny beach in Ohio.
For 30 years, Dan Smith was a driver-salesman and local union representative, before building a successful income-tax practice in Toledo, Ohio. He retired in 2022. Dan has two beautiful daughters, two loving sons-in-law and seven grandchildren. He and Chris, the love of his life, have been together for two great decades and counting. Check out Dan's earlier articles.
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June 23, 2024
Turning It Around
BACK IN THE 1980s, I was working for an insurance company on Wall Street. This was when I was between marriages. There was a nearby bar and restaurant called Harry’s, located below street level. The bond market was going strong, so the bond salesmen with their fat paychecks were there, which meant the pretty young girls were also there.
The place reminded me of Cheers, one of my favorite TV shows. The theme song and the storylines always made me feel good. One of the show’s most memorable characters was the mail carrier Cliff “Cliffy” Clavin, played by John Ratzenberger. How he got the part has always been an inspiration to me.
Ratzenberger was auditioning for the part of Norman, the heavy-set guy who just sat at the bar and drank beer. Ratzenberger didn’t get the part. But instead of walking away, he asked the casting director if there was a bar know-it-all among the show’s characters. There wasn’t.
Ratzenberger then explained that this person, regardless of topic, always seemed to know something about the subject at hand. Thus was born the character Cliffy Clavin. If Ratzenberger had simply assumed he’d lost the part, we’d never have known Cliffy.
When I taught a Dale Carnegie course on human relations and public speaking, we’d refer to such instances as “thinking on your feet.” We’ve all experienced situations we didn’t anticipate. It’s those individuals who can shift gears, and turn the situation to their advantage, who succeed. Think of the folks who can always talk themselves out of a traffic ticket. Ratzenberger was thinking on his feet when he brought up the bar know-it-all.
I had such a moment at the end of my second year at community college, when I persuaded my guidance counselor that I’d done enough to fulfill the English requirement, an incident I described in an earlier article. Still, I’m not the greatest “thinker on my feet.”
To make the best of a bad situation, we need to feel all is not lost. Have you heard the expression “making lemonade out of lemons”? The more practice we have doing this, the easier it becomes.
Think back on times where you turned a bad moment to your advantage. Understanding how you did it will help you to repeat that way of thinking. The goal in these situations: Don’t react, think.
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Raising the Bar
How did he do it? The strategy Taleb used is known as a “barbell.” On one side, most of his portfolio was invested in extremely conservative government bonds. But on the other side, Taleb held a large number of option contracts. As its name suggests, an option is an agreement that gives an investor the option to buy or sell an investment at a particular price. A stock option, for example, might give an investor the right to buy a stock at $20 per share. In this case, the option would become valuable if the stock’s price rose above $20, because it would allow the option holder to buy the stock for $20 and then resell it for more.
In Taleb’s case, he held what are known as “out of the money” put options. This type of option gives an investor the ability to sell an investment at a fixed price. Such out-of-the-money options only have value in the event of a sudden and severe market downturn—a relatively rare event—so these options tend to be inexpensive. That allowed Taleb to load up on them at a modest cost.
On that day in 1987, when the market dropped 23%, these options suddenly multiplied in value. Options that he’d purchased for a few cents were now selling for as much as $5.
Because of stories like this, barbell investment strategies can seem attractive. As Taleb later described in his book The Black Swan, barbells allow investors to be simultaneously “hyperconservative and hyperaggressive” and thereby protect themselves from—and even benefit from—unpredictable risks like the 1987 crash.
Though it worked for Taleb, the strategy entails a few challenges. First, it’s complicated. Buying options requires both expertise and constant vigilance. And because option contracts have a limited life, an option can easily expire worthless, losing 100% of its value. The good news: You don’t need complicated and risky strategies like this to benefit from a barbell. There are other, simpler approaches.
The easiest might seem deceptively simple: If you own a combination of stocks and bonds, the result can be a very effective barbell. Over the past 10 years, the correlation between the S&P 500 and the bond market has been just 0.3 (on a scale where 0 represents no correlation and 1 represents perfect correlation). And that’s just the average.
In many years, the correlation between stocks and bonds has been negative, meaning that bonds have gained in value when stocks have dropped. We saw this between 2000 and 2002, when the market fell three years in a row. We also saw it in 2008, when the stock market plunged 37%, and we saw it again when the pandemic hit in 2020.
A variation on this strategy would be to combine stocks with cash investments. That can work, too. But because bonds have the ability to gain in price—and cash doesn’t—bonds tend to be more effective in a barbell.
That said, bonds can also lose value. To guard against that, you might diversify your bond holdings. You could, for example, hold a mix of short-term and intermediate-term bonds. While intermediate bonds gain more when rates fall, short-term bonds hold their value better amid rising interest rates. To further diversify this side of your portfolio, you could hold a mix of bond funds and individual bonds. However you structure it, the key is to make this side of the barbell as stable as possible.
Some people dislike barbell strategies because it means that part of their portfolio will, by design, be slower growing. That concern is understandable. To help overcome this concern, I suggest viewing bonds as insurance rather than as an investment. Bonds, in other words, aren’t there to make money. Instead, their role is to help your overall portfolio avoid losing money when the stock market is down. Just like a homeowner’s or auto insurance policy, bonds carry a cost, but they deliver an important benefit.
Beyond bonds, there are other ways to employ the barbell concept. Suppose you’re deciding when to claim Social Security. For each year you delay, between ages 62 and 70, Social Security will increase your monthly benefit. That’s the commonly cited reason for waiting. But there’s a barbell-related benefit, too: Because you’ll be receiving the largest possible guaranteed check from the government, you can afford to take more risk with your portfolio. That’s what Taleb was referring to when he talked about a barbell enabling an investor to be simultaneously hyperconservative and hyperaggressive.
Along the same lines, you could opt to annuitize a portion of your savings. That would also allow you to take more risk with the rest of your portfolio.
If you’re married, there’s another way you could use Social Security to help build a barbell: You could claim one benefit as late as possible, at age 70, and the other as early as possible, at 62. Strictly according to the calculator, this wouldn’t necessarily be optimal, but that overlooks the reality that none of us knows our own life expectancy. By claiming one benefit early, it can help mitigate this risk.
Barbells can be applied in other situations, too. Suppose you’ve benefited from one of the market’s highflying stocks, like Apple, Amazon or Nvidia, to the point where the shares now account for an uncomfortably large slice of your portfolio. One way to diversify this risk would be to add something like an S&P 500 fund to your portfolio. That would only be partially effective, though, because that fund would include the stock where you’re already overweight, thus increasing your exposure.
A solution to this problem would be direct indexing, where you’d purchase each of the stocks in an index individually. That might sound unwieldy, but there are services that automate this process. These services allow investors to tailor their portfolios in ways that aren’t possible with traditional index funds. In this case, you’d exclude the one stock you happen to already own, so you might buy just 499 of the 500 stocks in the S&P 500. That would be another sort of barbell—one that would help diversify your large overweighted stock position.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.The post Raising the Bar appeared first on HumbleDollar.
June 21, 2024
Raise Your Voice
OVER THE PAST SEVEN years, HumbleDollar has become my professional life's passion. Cancer means I have maybe another year in me—and then it’ll be up to you. My hope: The site will have a life beyond me.
On the site’s homepage, just below the latest articles, you’ll find a new feature dubbed Forum. Will HumbleDollar have a lively future, rather than fading into a dusty collection of old articles? That all depends on whether readers and writers embrace the Forum, and start initiating discussions and responding to others’ posts.
As I envisage it, the Forum offers folks a chance to recount their recent financial experiences, describe their money journey, ask questions and post observations about the financial world. Found a great place to buy certificates of deposit? Upset about the latest change at Vanguard Group? Trying to figure out how to minimize your Medicare premiums? Got an interesting strategy for generating retirement income? I’m sure other readers would love to hear more and, in return, share their wisdom. To start a new discussion thread, head here.
The Forum will, I hope, be more than your run-of-the-mill online discussion board, for three reasons. First, HumbleDollar has a reputation for civil discourse, avoiding the nastiness and tiresome political posturing found elsewhere. This is a rarity these days—and, I believe, helps explain why the site’s readers are so loyal and engaged.
Second, thanks to both the writers and commenters, the site has become a place where folks talk honestly about money. Instead of hollow boasts about purportedly great investment performance and supposedly smart financial moves, readers regularly use the comments section to talk about their financial mistakes and struggles.
Finally, as I step back from the site to focus on my health, I believe the Forum could become the vehicle for folks to continue posting longer articles. Those articles won’t be edited by me, but I suspect readers will still find them valuable. Indeed, earlier this week, I emailed regular writers for the site—both past and present—encouraging them to post longer articles in the Forum.
You’ll already find a healthy number of discussion threads within the Forum. The reason: I had HumbleDollar’s ever-diligent web developer transfer the old Voices questions into the new section. With the Forum now launched, the Voices section has disappeared from the site.
What about the site’s regular articles, which for now I’ll continue to edit, with help from my deputy, Greg Spears? Next month, instead of a dozen articles and two weekly newsletters, the site will be cutting back to four or five articles a week and just one weekly newsletter. My hope is to keep up that publication schedule through at least February 2025.
Observant readers might have noticed one other modest change to the site. On the homepage, under the “Get Educated” banner, there’s a slew of short items dubbed Act, Think, Truth and Manifesto, as well as previews of sections from the site’s money guide. I’d long been planning an additional feature known as Humans, and my diagnosis has spurred me to get that wrapped up. I’m in the midst of writing and loading into the publishing system 75 of these short pieces, which describe our various financial foibles.
But the big change is the Forum. So, what are you waiting for? Please check out what’s been posted, and perhaps add a comment or even launch a new discussion thread. To post, you’ll first need to register to comment, if you haven’t already. Go here to find out how.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.The post Raise Your Voice appeared first on HumbleDollar.
Life After Cars
DO YOU REMEMBER the days before you could drive? You felt like you were on a leash. No freedom. No fun.
I have news for you: Those days could return.
One of the post-age-65 nightmares that we don’t talk about enough: Most affluent retirees live in the suburbs. Homes are miles from grocery stores, medical offices, movie theatres, restaurants and—perhaps most important—drugstores.
In the suburbs, the stream of city-based public transportation usually slows to a trickle. Sidewalks are mostly nonexistent. Even when they’re there, a five-or-six-mile hike to the nearest drugstore is probably too much, especially now that we have summers when the heat index soars to 115.
Do you think you’ll always be able to drive? Don’t be so confident. That’s what my father thought. He was a retired school principal first licensed to operate a motor vehicle when Franklin Roosevelt held office. Having developed balance issues in his 60s, Dad was placed on Dilantin. Despite the medication, his balance issues grew worse and came to a head in his mid-70s.
One day, I received a call from Dad. He was distraught. “The bastard took my license,” he told me.
Apparently, the neurologist treating my father had decided that the balance issues now compromised public safety. A mandated reporter, the neurologist duly informed the Pennsylvania Department of Transportation. Thus, my father’s driving privileges were deposited into the dustbin of history.
From a safety perspective, I don’t question the neurologist’s decision. My dad had been getting into minor accidents. After he died, I learned that there had been more incidents than he’d mentioned. When I was getting the house ready to sell, I discovered a sliding glass door in the dining room had been smashed. I called the local police to make a report. As I talked to the police officers, one told me that my father had knocked over some mailboxes with his car. “He never told me about that,” I said.
The officer smiled and said, “He was probably embarrassed and didn’t want you to know.”
While rescinding my father’s driving privileges preserved local mailboxes, the action devastated my parents. Married in 1956, they were that era’s definition of independence. They went where they wanted when they wanted. They would motor from their suburban home to a destination 100 miles distant just for a little get away. They lived life on their terms.
For about six months after my father lost his license, my mother drove. Then she had a stroke, and her driving days ended. For the remainder of his life, my father took taxis everywhere, even to the convenience store for milk. This state of affairs did not constitute a pleasant existence for either of my parents.
Independence had disappeared.
Despite the pain of license revocation, there was a slightly humorous epilogue to the story. When my father became sick, I began flying home to Erie from Minneapolis. When I’d arrive at Erie International Airport, I would call for a taxi to take me straight to the hospital. I would give my first and last name, and the taxi dispatcher would ask, “Is this Walt’s kid? How’s your dad?” Practically every taxi driver in Erie had gotten to know my father. They were genuinely sad when he died.
Unless you want to end up as a celebrity to taxi and Uber drivers, you might take steps to ensure that your post-driving days allow you as much access to the world as possible. To be honest, the problem of life after cars isn’t an easy one for most senior American suburbanites to solve.
I see three possibilities. First, you can live near children who are willing to repay all the hauling you did. Unfortunately, college-educated children often move far away from their parents.
Second, you could move into a senior living facility that’ll have outings. Personally, I’d find such a situation terrible: summer camp for geezers. Perhaps an alternative could be finding an all-ages intentional community that would swap transportation for chores. Few intentional communities exist in the U.S., and those that do might be reluctant to take on very senior members.
Third, you could move to an urban location where you can walk to most necessary amenities. In this country, though, very few truly walkable and safe cities exist. One article notes that “a study in the Journal of Medicine and Health found that the rate of social isolation was twice as high for seniors who did not drive as for those who did.” It may be true that no man is an island, but it can certainly feel that way in the suburbs without a car.
The article’s author, Daniel Herriges, argues that “the most important and highest returning investments our cities and towns can make now are in access for those who don’t drive.” While Herriges is correct, major changes in the infrastructure of most cities and towns seem unlikely. Thus, you’re left with few good choices if you’d like to move from the suburbs to a walkable environment.
My own plans involve moving back to Pennsylvania when I retire. Pittsburgh offers some walkable neighborhoods, such as Shadyside, and senior-safe public transportation. I’ve also considered moving back to Philadelphia, where I went to college. Parts of the city, especially South Philadelphia and Center City, are both nice and walkable. But Philly’s public transportation system, SEPTA, can be a little terrifying, especially at night. What was edgy when I was 19 might be discomfiting at 70.
If I do move back to Philadelphia, I’ll probably follow in the family tradition and become that old guy that all the taxi drivers get to know.
Like father, like son.
Douglas W. Texter is an associate professor of English at Johnson County Community College in Overland Park, Kansas. Doug teaches a composition I course that focuses on personal finance. His essays and fiction have appeared in venues such as the Chronicle of Higher Education, Utopian Studies, New English Review and The Writers of the Future Anthology. Check out Doug's previous articles.The post Life After Cars appeared first on HumbleDollar.
