More Blessed to Give Than to Receive

 (Visit my new ministry/small business website at www.LastWordOnMoney.com)

To my six-year-old mind, it was a marvel of the dawning space age.  Just by turning a couple of knobs I could create pictures on a gray screen and even write my name—then magically erase it with a shake of the device.  An Etch-a-Sketch.  And I had asked Santa for one for Christmas.

That Christmas stands out in my memory because it was when I learned the truth about Santa Claus, thanks to some careless concealment of the Etch-a-Sketch.  You see, my bedroom was really a multi-purpose room.  Our house, with six people residing there, was very small; so I shared a room with my brother…and an ironing board with other household accessories…and a towering piece of furniture with drawers and a place to hang clothes that had been converted to a catch-all for miscellaneous out-of-season family clothing.  And it was in that space that someone in my family hid the Etch-a-Sketch, waiting until Christmas Eve to put it under the tree.  So my coveted toy was literally six feet away from my dreaming head each night.  Until I innocently went digging in the clothes pile one day and put two and two together to discover who Santa really was.

The story of my discovering another Christmas truth—that it is better to give than to receive—is not so easily traced.  I didn’t grasp it as a six-year-old, maybe not as a twelve-year-old.  But I think at fourteen, as my mother lay dying at Christmastime and I tried to think of an appropriate gift for her, it began to dawn on me.  She never got to use what I bought her for Christmas that year, and my giving it brought me no joy, although there were plenty of other reasons to be sad that holiday.  But I realized then that the people I love will not necessarily always be around, that their lives may be full of pain and secret angst, and who am I to expect something from them?  Shouldn’t I be doing what I can to make them happier?

I like to read and talk and write about money.  I like to help people manage their money and live more comfortably.  That’s why I write this blog, do volunteer work, and have a ministry devoted to it.  But money is not everything or even the main thing in life.  It can sure make life easier sometimes, but it can just as easily bring misery.  But giving to others, helping others…I’ve never known that to not pay handsome dividends.  Remember that this Christmas.

Merry Christmas, friends.

Until next time,

Roger

“Nevertheless, there will be no more gloom for those who were in distress….The people walking in darkness have seen a great light; on those living in the land of deep darkness a light has dawned….For to us a child is born, to us a son is given, and the government shall be on his shoulders.  And he will be called Wonderful Counselor, Mighty God, Everlasting Father, Prince of Peace.” Isaiah 9:1,2,6 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

But Tom Brady Said....

 

If you watched the baseball World Series last month, you might have noticed the umpires sporting the letters “FTX” on their uniforms.  Or maybe you’ve seen an ad for “FTX” that featured Tom Brady, Steph Curry, or another celebrity.

FTX is (or maybe at this point I should say “was”) a cryptocurrency exchange based in the Bahamas that rocketed to fame and apparent success thanks to its flamboyant 30-year-old founder and CEO, Sam Bankman-Fried.  His business model seems to have been to hobnob with big shots in the financial world, propose and institute bold—if unwise—practices for his operation, freely throw money around, and court endorsements from celebrities in exchange for a stake in his company—all while acting the part of the offbeat MIT-graduate whiz kid, dressing in khaki shorts and tennis shoes while hosting cocktail parties on the beach and meeting with the more staid colleagues in the financial industry.

Perhaps it was that iconoclast image, the brilliant rebel reputation, that attracted all the followers—and investors—to his company.  He pitched a new approach to the futures market at the Futures Industry Association (FIA) meeting last year.  Evaluated objectively, his proposal bypassed the structure that is meant to protect investors and thereby introduced new risks to the market.  But that didn’t seem to faze many or even most of the people listening to his pitch.  He was offering a “gateway to the crypto world” (in the words of the Washington Post), with FTX operating like a bank in that it maintained customer accounts, exchanged currencies, and made loans and other investments with investors’ money.  But it operated without the tough regulations and oversight of a normal bank or exchange.

As Adam Levitin, a Georgetown University law professor and expert on cryptocurrency issues astutely observed, “People invested billions in an unregulated financial institution based in a Caribbean island.  How could this end well?”

Now FTX has collapsed, Bankman-Fried has lost his entire $16 billion fortune, the money of nearly one million investors has disappeared, and several celebrities are facing lawsuits for their part in hyping what many are saying amounted to a Ponzi scheme.

I can’t say that I have a lot of sympathy for the people suing those celebrities.  Well, maybe for some of the small-time investors.  But how many times does this have to happen; how many too-good-to-be-true investments have to fold in bankruptcy; how many celebrities whose fame is in sports, fashion, or just about anything other than finance, will endorse an investment that will supposedly make us rich but turns out to be fool’s gold, before we learn the lesson?

As with nearly any bad investment, there were people who were raising red flags about FTX, including the FIA itself.  Maybe not waving those flags as vigorously as they could or should have, but they saw problems with the model on which FTX was based and steered clear of it.  But the hype, the novelty, the celebrity….it overcame most hearers’ good sense.  According to the New York Times some big firms like BlackRock backed FTX.  And Bloomberg flatly wrote, “Many sophisticated finance pros were duped by Bankman-Fried’s wacky charm.”

Common sense, everyone.  As the saying goes, “If it sounds too good to be true, then it probably is.”  And the rule applies not only in high financial circles but in our everyday decision-making.  Our culture seems to always steer us to be in pursuit of the big—and fast—buck.  Instead of slow-and-steady investing and seeking sound advice, we let a Victoria’s Secret model or a sports superstar tell us where to put our money.  Or maybe we should listen to them—then do the opposite of what they suggest.  I expect that would work out much better for us in the end.

Until next time,

Roger

 

“For where you have envy and selfish ambition, there you will find disorder and every evil practice.” James 3:16 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

Totally and Absolutely Ethically Invested? I Doubt It

 

In my post last week I addressed how lack of transparency in the corporate world (and not just the American corporate world) challenges the ability to invest according to one’s values.  I used environmentalism as an example.  But the challenge applies to anyone seeking to invest according to whatever values he holds. 

As a Christian myself, let me use that as a starting point to illustrate.  There are a number of brokers that tout their Christian-oriented investments.  They generally steer clear of investing in companies which profit from the sale of alcohol, tobacco, firearms, “adult entertainment”, and gambling services.  When I checked a few of these funds I found large energy companies (hydrocarbons) and mining companies among the largest holdings.  For someone who is a Christian and also cares about the environment, this would be a problem.  One of the companies heralded it plans to reduce emissions 99% by 2030 (sound familiar?).  It was also in the news for having to pay a $12 million fine to a state environmental agency for pollution it caused.

But if environmentalism is not this Christian investor’s priority, would he then be okay investing in these funds?  Well, how about the presence in the fund’s top holdings of a company that supports the intelligence community and its sometimes deadly activities?  It’s there.  As is a company that manufactures microchips that can be used in lethal, high-tech weapons and slot machines. Or if this conscientious investor wants absolutely nothing to do with alcohol or companies that profit from it, would he object to Costco (a large purveyor of wines) being among the top holdings (which it is)?

Mutual funds generally hold the stocks and bonds of dozens or even hundreds of companies, so even a top-10 holding in their portfolios may only comprise one to two percent of the money invested by that fund.  So if I have $10,000 invested in a fund that has total assets of $150 billion dollars, my investment represents only 0.000000066 of that fund which might invest only 1% in a company on my naughty list.  It’s so small as to be insignificant.

But this assumes an investor can actually identify the bad players he wants to avoid supporting.  At one time Altria owned Kraft Foods.  Altria is best known for owning the large tobacco company, Phillip Morris.  Did you boycott Kraft Mac n’ Cheese while Kraft was owned by Altria?  Did you then rejoice and put it back on your shopping list when Altria divested from Kraft?  Do you have a buy/no-buy list of brands when you go shopping?  Good luck keeping it up to date.  Just look up the history of some of the largest American brands and see how often they change hands or purchase and sell and merge with other companies.  It would be a fulltime job to track it all in the interest of keeping your portfolio “pure”.

Let’s take it farther.  How about the $10,000 held in a certificate of deposit at the local bank?   The bank uses money on deposit to lend to individuals and businesses.  Should I be questioning the bank whether they helped fund the new tobacco and vape shop down the road?  Depending on the bank’s assets and the size of the loan, I might have inadvertently contributed a great deal more than 0.000000066 to that distasteful enterprise by virtue of my money being held by the bank.

Moreover, many companies make political or charitable contributions that I may find objectionable.  Do I vet every company in a mutual fund along that criterion?  Some companies even hedge their bets politically and contribute to both political parties.  What do I do with that?

My point is that this world is interconnected.  I don’t drink alcohol or want to encourage drinking by others, but I shop at grocery stores that sell it.  I don’t approve of one national retail chain’s approach to alternate lifestyles, but I still patronize that chain, because they often have very good sales.  Should I spend more money to shop elsewhere?  Though I infrequently go to a movie, will I stop doing that because next week that theater may be showing an “R” rated film that I cannot condone and would not view?  Should I put my money under my bed instead of at the bank so I don’t end up indirectly supporting a business I find objectionable?  Should I pore over the financial reports of every company of which I own a minute share by virtue of my 401(k) account investments, to be certain they don’t cross my dearly held beliefs?  That would require quite an investment of time.  And can I trust even a Christian-oriented brokerage firm to offer me only investments in companies that not only don’t sell alcohol, tobacco, etc. but are not critical suppliers to those who do and which do not violate other values I hold that are not specifically “Christian”?

Some groups of investors take an activist approach to their value-based investing, buying stock (which is, after all, an ownership stake) in companies that violate the investors’ principles but with the intent to use that ownership to effect positive change in the company.  At one of my recent jobs, my employer was about to take what I considered an unethical stand in regard to a client.  I was about 24 hours away from turning in my resignation over it.  But then my son reminded me of this principle, that I might disagree with some things my employer did but if I were to resign then I would not be there to mitigate the damage from this one action by the employer, help prevent future bad actions, or be there to advocate for clients who might suffer from those actions.  (In the end, the employer reversed course and did not take the action against which I was protesting.)

So while I don’t patronize vape shops, buy and consume alcohol, or work at a casino, I choose NOT to seek out only investments that meet my specific value system.  I don’t object to principled individuals trying to do so, and I respect their right to disagree with me.  But for me, the task requires too much time to research and in the end would probably prove futile. 

Until next time,

Roger

“I wrote to you in my letter not to associate with sexually immoral people—not at all meaning the people of this world who are immoral, or the greedy and swindlers, or idolaters.  In that case you would have to leave this world.”  I Corinthians 5: 9-11 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

 

Investing According to Your Values?

 

Investing according to one’s non-financial values seems to be a growing trend.  Money magazine reported in its November issue that sustainable funds (defined in the article as environmental-, social-, and governance-focused, or ESG, investments) in the U.S. took in a record $70 billion in new money in 2021, up 35 % from 2020.

The article in Money also noted, however, that the trend has attracted some negative attention in the form of some states’ attorneys-general who are accusing ESG fund managers of letting a political agenda drive their investment decisions rather than the financial wellbeing of their clients.

I’m not going to jump into that debate.  I find it perfectly acceptable, commendable even, that someone would want to invest according to his values and principles.  And if environmental issues are important to you, then by all means you should have the freedom or even the responsibility to put your money into companies that promote your values.  Conversely, if I think Exxon is a good investment and I don’t care if they produce and sell fossil fuels, I should have the freedom to invest in Exxon.

But I do have more than a little skepticism about value investing in general.  It is much harder to adhere to one’s values in the investment world than one might think.  Let’s use environmentalism as an example.

Perhaps you’ve heard some of the extraordinary claims made by some companies about the progress they have made to become more environmentally friendly.  Bloomberg this week cited several:

“Proctor & Gamble vowed to cut its heat-trapping emissions in half by 2030, before announcing it had surpassed its target a decade early.”

“Cisco Systems Inc. recently said it had exceeded a goal to reduce its climate pollution by 60% over 15 years.”

“Continental AG, the German tire and auto parts juggernaut, claimed it had slashed greenhouse gases by an astounding 70% in 2020.”

Wow, I’m breathing easier already.

Or not.  Because Bloomberg Green’s investigation showed that the reductions were more like 12% for P&G, 8% for Continental AG, and a 22% INCREASE in emissions at Cisco.

What gives?

It boils down to an accounting trick—or (some heavily polluted) smoke and mirrors, if you will.  Each of those companies used what is called market-based accounting when calculating their climate impact.  Under this bookkeeping method, a company can purchase credits from clean energy providers so they can lay claim to burning clean energy and show a reduction in emissions to investors.  The clean energy may have been used by another company—or even you!—but they take the credit for cleaning up the world.  And these are just three companies among hundreds or even thousands that use this widely accepted methodology.  Nor does the misdirection end there.

Inside Climate News last week ran an article about the supposedly vanishing emissions generated by fossil fuel companies.  Under pressure from value investors who are pushing for greener practices, these energy companies are divesting from some of their older and dirtier assets likes wells and coal plants.  But as the magazine points out, private equity firms are eagerly snatching up these assets.  After all, the war in Ukraine has proven we still desperately need, and will pay top dollar for, fossil fuels.  Europe and the U.S. are scrambling to find secure sources of natural gas and oil, not solar panels.  These privately held companies do not have the investor pressure to clean up the environment and are exempt from many of the financial reporting rules governing publicly traded companies.  As long as they are making money—and I’ve got to believe in the current state of affairs they are—these private firms will continue to run these higher polluting assets, probably for much longer than the original owners would have.  The net result is a greener ConocoPhillips or Shell or BP, but a dirtier world. 

Is nothing what it appears to be?  What’s a conscientious value investor to do?  Next week I will continue on this topic, bring it closer to the level of personal finances, and offer what you may find to be an unpalatable take on the whole subject of value investing.

Until next time,

Roger

“Save me, Lord!  There are no good men left, and honest men can no longer be found.  All men lie to one another and deceive each other with flattery.”  Psalm 12:1,2 Today’s English Version

Spend Now, Save Later? What?!?!

 

MarketWatch recently published a somewhat controversial article that was picked up by a number of other news organizations mainly because it ran counter to what nearly every financial expert and teacher has preached for years (and thus made for great “click bait” on the internet).

The article, citing research based on Nobel-prize-winning economic theory dating back to the 1950’s, advocates the Life Cycle Model of financial behavior.  By the author’s own description, this model is one “in which rational individuals allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living.”

To illustrate, a young adult fresh out of college and in his first job is likely on the low end of a high income scale at that point but has excellent prospects for wage growth over the coming years.  According to this model, he should not be saving for retirement at that point but instead use all of his income to establish and maintain a desirable standard of living.  As his income grows, he can maintain that same standard of living but begin saving at some point—probably middle age, when he has reached his peak earning years—for his retirement.  In theory, he should be making enough in wages then to not only keep his accustomed lifestyle but have enough left over to save adequately for retirement.  Then, in his golden years that retirement fund will pay for that same standard of living.  He will have smoothed out his consumption over all those years, never living like a miser but never living extravagantly either. 

“In the life-cycle model, we are assuming you are getting the absolute most happiness you can out of income each year,” explained Jason Scott, one of the researchers.  So the idea of socking money away in an employer’s 401(k) plan and getting the employer match money that goes with it is wrong, he believes, because the relatively low wage earner in his early years would have to lower his standard of living in order to save.  That sacrifices happiness.  It’s what Scott calls the “welfare cost” of saving too early for retirement.

Where can I even begin to tell all I think is wrong about the Life Cycle Model?  Well, let’s start with the saying that “it is not timing the market but time in the market” that matters.  This simply means that instead of constantly trying to time your investment purchases and sales to maximize your gains (“buying low, selling high” and thus always glued to the market to guess when it’s at its lowest or highest), investing early in life and leaving the money there to grow over time through all those ups and downs is the most successful way to save for the future, and study after study has demonstrated this. If an individual waits until mid-life to start saving, he will be compelled to stash away a much higher percentage of his income to achieve the level of savings needed to sustain his established lifestyle in retirement.

And not save when you are young?  For anything?  How about an emergency fund for a car repair you’ll likely need sooner or later?  Or just a new set of tires?  Or the $500 insurance deductible for that ER visit?  The study’s authors concede young workers will need to save for emergencies, but how much is enough?  One thousand dollars?  Two?  Six months’ salary in case you get laid off?  Yep, that can happen (just watch the job market gyrate in the next recession).  Life happens.  It is not always the smooth ride, devoid of “sharp changes”, that is envisioned in some financial theory, including this one.  How much welfare cost should that worker pay to save for those things?  The theory doesn’t answer that question.

Saving for retirement when you are young comes with some welfare costs, as Mr. Scott argues, and he contends that those costs are not worth it, even for the employer match to workers’ 401(k) accounts—the “free money” that an employee gets for his retirement.  Scott thinks even that does not make it worth sacrificing a more comfortable standard of living when you are in your twenties.  Spend away, save later.  As he went on to say, the puny gains to be had in the market, sometimes not even keeping pace with inflation, are just not worth the pain of saving in the early working years.  Well sorry, Mr. Scott, but the statistics consistently show that over time the market DOES reward those who invest early and long. 

I believe he is comparing safer investments, like bank accounts, against inflation, and by his own admission this is a weakness in his argument.  But following the Life Cycle Model, an individual who doesn’t start a retirement account until his late thirties or early forties will not only have to invest larger sums (since the money will be invested for a shorter time) but will likely have to put it in higher return—and thus riskier—investments to make up for lost time; or else pony up even larger sums of cash to set aside since it will grow very slowly in standard bank accounts and certificates of deposit and not easily fund his familiar lifestyle.

But for me the most compelling argument against the Life Cycle Model is found in the researchers’ own explanation of the model as one in which “rational individuals allocate resources over their lifetime”.  Rational?  That leaves out, oh, 99.44% of us when it comes to money.  One of the recurring themes in my blog is the irrationality of people when it comes to money.  We are products of our upbringing; attitudes toward money—how to make it, spend it, save it, use it for power, use it to help others—are shaped not by rational thinking but by what we are taught or what we observe in others, especially our parents.  Books and theses have been written about this, and simple observation confirms it for me.  For example, our natural tendency is to raise our standard of living over time as our income increases in real value.  How many people do you know that have as their goal “smoothing out their standard of living” throughout their lives, avoiding sharp changes in their money habits?  No, we want not only to improve our own financial lives over time but aim for our children to do even better.

Once again, academic economic theory falls flat in the face of human behavior.

Until next time,

Roger

“The wise man saves for the future, but the foolish man spends whatever he gets.” Proverbs 21:20, The Living Bible

Forgive Us Our Debts?

 

When teaching classes on personal money management and I come to the topic of getting out of debt, I am very reluctant—as I think most responsible teachers are—to recommend a consolidation loan.  The concept is simple enough and seemingly quite logical: borrow all the money you need at one time to pay off every other debt you owe.  That leaves the borrower with just one debt, hopefully with a lower interest rate, and with a monthly payment that is somewhat less than the total of all the previous debts’ monthly payments.  This not only simplifies life for the borrower but gives him some breathing room in his budget if he was struggling before to make all his payments.

But logical as it may appear, that plan can fall apart when it runs up against the reality of how people actually behave; because to a greater or lesser extent, all of us make financial decisions based on emotions and learned behaviors.  The danger in this particular “solution” to debt is that it does not address the root cause: how and why the person got into debt in the first place.   Someone who cannot control their spending, who treats money as the means to happiness by buying anything he wants, will likely end up mired in debt.  And if that person takes on a consolidation loan and ends up with a few extra dollars in his pocket, in most cases he will continue that pattern and wind up in a worse place financially.

I thought about that last month when the president announced the blanket forgiveness of $10,000 of federal student loan balances.  But the problems this action creates are even more complicated and dangerous than a consolidation loan and has impacts throughout the economy.

The most obvious danger, and one the president felt compelled to defend against from the start, was that it would aggravate inflation which is already at 40-year highs.  We were assured that other factors would offset this and there would be negligible impact on inflation.

Hmm.  Seems I’ve heard that before.  Like last year about this time, and earlier this year, when we were assured by government economists that a flood of government spending was not going to trigger inflation.  

How about colleges and universities?  They certainly had some incentive to push for loan forgiveness.  If a potential applicant to college thinks that he can borrow all the money he needs to attend, with the possibility someone else will foot the bill for him in the end, then sure, he will do it—even if he’s not “college material”.  And believe me, I went to school with any number of people who could not scholastically hack college and dropped out with a load of debt.  But what does the college care?  They were paid for the time he attended.  And with the government serving as a plentiful source of money, what incentive do the schools have to keep tuition lower?  No, instead they build luxurious campus housing, compete with each other to have the most amenities for students (non-academic amenities, such as climbing walls in the student center, or academic ones like remedial reading courses for the people who probably should not have gone there in the first place), and just generally spend money frivolously. 

If you reward a behavior, you will get more of that behavior, whether from students or institutions.

But maybe the most galling of all to me is the ingratitude of the recipients of this government largesse.  Not 24 hours after it was announced, a woman who has outstanding loans far exceeding the $10,000 limit was in the media saying she would refuse to pay ANY of her remaining balance because the whole system is unfair.  She lamented, too, that people who went to school decades ago don’t understand how expensive college is because the cost of a higher education has spiraled upward far faster than the national inflation rate.

Okay, fair enough.  I agree that there is some unfairness in the student loan program when it comes to the loan forgiveness programs.  They are a maze to figure out, and people who should have qualified did not due to bureaucratic snafus.  Nevertheless, at least there IS a route to loan forgiveness.  How many loans do YOU take out that have a forgiveness program?

THEN I learned that this woman is age 61 (not unusual these days to have older people still saddled with student debt).  I’m in my sixties, too, and when I went to college tuition at the public university I attended was $415 a year (2 semesters).  Even when I transferred to a private college I was able to pay my entire bill with the earnings from summer jobs, part-time work during the school year, and modest assistance from my parents in the form of Social Security survivor benefits after my mom’s death.  So this woman was in college about the same time as I was and gets no sympathy from me.  Although I guess I’m helping to pay off her loan, even if she isn’t.

Until next time,

Roger

“The wicked borrow and do not repay, but the righteous give freely.” Psalm 37:21 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

Important First Steps for End-of-Life Planning

 

Of all the difficult discussions about money, perhaps none is as difficult to have as the one about end-of-life planning.  Talking to your adult children about your eventual death (or to your aging parents about their eventual death) is likely painful for all parties to the conversation.  According to one study, only 46% of adult Americans have a will; and I suspect even fewer have had an adequate discussion with their family about their wishes for after they die.

I’m not going to dwell on the very good reasons that most every adult should have a will.  Crafting that document might be an emotionally trying experience for many.  So let me aim at something simpler: updating your beneficiaries and the titles to your property.

While a will is typically the document that spells out the final wishes of an individual for the distribution of his estate, it is not the only such document or even the most important one in many cases.  Did you know, for example, that the beneficiaries you have named for your 401(k) account will get that money after you die, regardless of what your will might stipulate?   In other words, a beneficiary designation trumps the will.  This is true for other assets, too, such as an insurance policy.

This surprises many people, but there are some huge advantages to this.  Perhaps the biggest is the fact that this allows the 401(k) account to escape going through the probate process.  That legal process can take a year or longer, preventing timely distribution of the estate assets to the surviving family or other persons named in the will as beneficiaries.  Moreover, by falling outside probate, the money is not usually subject to any probate taxes the state may assess.

If you are put off by the thought of end-of-life planning, then just take the first baby steps and make sure you have up to date beneficiary designations for your retirement accounts.

And retirement accounts are not the only assets you can keep out of probate and still leave for the person or person you want to have them.  In Virginia where I reside, as well as in many other states, you can also:

·         Make a bank account payable on death to a named individual(s).  The person has no access or right to the account until all regular owners of the account have died.  This might be especially useful for a family member who will be your executor and responsible for paying off any creditors.

·         Have a transfer-on-death title for a motor vehicle.  It entails a small fee to issue a new title, and the vehicle cannot have a lien on it.

·         Have a transfer-on-death deed for your home.  Again, it requires a modest fee to issue a new deed.

·         Transfer ownership of securities to a survivor upon your death.  Check with your broker on how to do this.

·         Insurance policies: don’t make your estate the beneficiary of your life insurance policy.  That ties the money up in probate.  Make it payable instead to the people who will have to cover your funeral expenses (just a suggestion).

So for a typical boomer like myself, his assets are largely bank accounts, retirement accounts, vehicles, and a home; and he can keep all of them out of the probate process (in Virginia and many other states), saving hassle and money for those left behind.

Just updating a will after a major life event (e.g. a divorce) is not enough.  I’ve seen the very sad results of someone dying without having updated titles to property and beneficiaries, leaving a current spouse without a home or retirement funds while an ex-spouse got it all. 

A few simple steps for those who don’t want to think about their own mortality, but so important.  Now get to it.

Until next time,

Roger

“It is better to go to a house of mourning than to go to a house of feasting, for death is the destiny of everyone; the living should take this to heart.” Ecclesiastes 7:2 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

A Look Back at What I Wrote

 

As I look back over the (far too few) posts I’ve put up on this blog over the last year, I thought this might be a good time to give some updates on subjects I wrote about.  So…..

In “Used Car, New Car, or Same Car” I contemplated whether it was time to replace my 1999 Toyota Solara that at the time had logged 325,330 miles.  The check engine light had come on permanently and the air conditioner was blowing warm air in August.  I opted to tough it out and keep driving it through the last few weeks of hot weather last summer and maybe replace it this summer.   To my shock, when I tried the air conditioner this spring, it blew frigid air, as if it had just rolled out of the factory.  And the engine light is off.  Needless to say, I’m sticking with my beloved Solara.  Four hundred thousand miles, anyone?  Two miracles for one car is not too much to ask, right?

But that does raise once again the whole question of when to replace a car.  Should you trade it in while it’s still a reliable drive and has lower mileage or wait until it’s falling apart?  Ordinarily I’d say the latter; but as you probably realize, the market for new and used cars is going crazy, and the conventional wisdom may not hold true.  For example, my wife’s car—the “family car”—could bring us in trade-in value the full amount we paid for it 40,000 miles ago.  Essentially, we drove the car for free all that time (save for the gas and minor repairs and upkeep).  Should we take advantage of that high-value trade?  There’s an emotional appeal to that.  It’s a tough decision; and I’m sure we’ll be paying a steep price for the replacement ride.  But there might be a deal to be made—assuming I move quickly.  I have a feeling a recession is coming and this car market can invert again really fast.

In “A Safe Way to Earn 7% on Your Savings” I sang the praises of Series I savings bonds and their 7.12% interest rate.  I explained the advantages and disadvantages of a savings bond, but I still think it’s a solid investment.  Only now the interest rate is 9.62% ((It is adjusted every six months for the inflation rate.)  You may purchase bonds with that rate through October 2022, after which it will be firm for six months.  A new rate will be set on November 1, and at the current pace of inflation I suspect the rate will climb again at that time.

In “SCOTUS Got it Wrong”, I lamented what I considered a poor, anti-freedom decision by the Supreme Court that would likely limit the variety of investment options for patrons of company 401(k) retirement savings accounts by making companies liable for offering too many investment choices or needlessly expensive options.  Just a few short weeks later Fidelity started marketing a cryptocurrency mutual fund to 401(k) managers.  Fidelity claimed that they were doing so in response to high demand for such an option in retirement plans.  Does anyone besides me see a disconnect here?  Expensive?  High risk?  This is just the kind of fund the Court was aiming at.  If any companies added that mutual fund to their retirement plans, I’ve got to believe they are experiencing buyer’s remorse about now.  If they don’t get sued by disgruntled (and now much poorer) crypto investors, then I’m sure there’ll be a government bailout down the road.

And finally, speaking of cryptocurrencies, I railed against them in “My Non-cryptic Thoughts About Cryptocurrencies” in May.  I may still be proven wrong and they turn out to be a good investment, but I’m sticking to my guns on this one.  Crypto has been a disaster scene since I wrote that post, and the minor and short-lived recoveries of some cryptocurrencies has been due to panicked purveyors of the investments trying to prop up their shares; or worse, uninformed investors throwing good money after bad thinking that they are buying while the price is low and their shares will only go up from here.  Maybe.  Maybe not.  Still sounds like a Ponzi scheme to me, and even some major media voices have said the same.  Steer clear, is my advice.  And by the way, just because Fidelity is offering a crypto mutual fund doesn’t mean it’s a good investment.  Remember, it’s YOUR money they are investing.  They make money off your investment whether it goes up or down.

Until next time,

Roger

“If any of you lacks wisdom, he should ask God, who gives generously to all without finding fault, and it will be given to you.” James 1:5 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide

Can't Live on a Quarter Million

 It has become standard advice to people looking to increase their savings: “Bank your raise.”  In other words, when you receive a raise at work, don’t just add the extra money to your budget to be spent; instead, have it deposited each pay day directly into a savings account for a potential future emergency or into a 401(k) or Individual Retirement Account for your retirement.

That might be harder to do these days with inflation running amok.  Raises are not keeping up with inflation for most American workers.  Still, if you can trim expenses and even put half of a raise away in savings, it is progress.  And it might help you stay out of the situation faced by 61.3% of consumers: living paycheck to paycheck.

Yes, I was surprised by that large percentage, too.  But the survey cited by Bloomberg indicated that the number is rising and is already 9 percentage points higher than a year ago.  Now this doesn’t mean these individuals/families cannot pay their bills (although about 1 in 9 could not cover a $400 emergency expense by any means, including using a credit card), but it does mean that if even a single paycheck is missed, they could not meet all their expenses on time.

But the most surprising stat from this survey: 36% of households earning at least $250,000 annually (approximately the top 5% of earners nationally) report living paycheck to paycheck.  I’ve never come close to making that much money in a year.  I’ve learned to live on much less.  But I can envision these households ramping up their standard of living with each raise in salary.  I believe most people making that much money think that their income will only continue to grow; that they can afford to keep raising their standard of living and keep up with peers.  But in a teetering economy as we have now and with some large firms starting to lay people off, that is dangerous thinking.  They could have benefited from the “bank the raise” advice as much or more than someone earning $35,000.

But there is one telling caveat to this survey.  Those of the millennial generation (born between 1981 and 2000) who are in the quarter-million-dollar club comprise an outsized percentage of those living paycheck to paycheck (55.4%).  I imagine this is due to their being trapped in a high-priced housing market where even a starter home’s price can break the bank, and being in the middle of rearing children, always an expensive proposition.  Nonetheless, they would be wise to follow some simple steps to cut out some of the extravagances they may have become accustomed to, start tracking their expenses more carefully, and save a bigger portion of their income.

That’s always good advice, for any of us.

Until next time,

Roger

“Whoever loves money never has enough; whoever loves wealth is never satisfied with their income.” Ecclesiastes 5:10 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

My Non-cryptic Thoughts About Cryptocurrencies

 

Does a day go by without “cryptocurrency” making the news?  It is the trendiest thing in the investing world, and everyone wants in on it.  Well, not everybody.  Not me, for one; and I’ve got some good company.

So what are my objections to cryptocurrency?  Glad you asked.

1.      I am not going to take the time to explain the whole concept of cryptocurrency.  That’s because I cannot confidently (and completely) do so.  And that’s the first problem; I doubt the vast majority of wanna-be investors in cryptocurrency could adequately explain the “mining” process, block-chain technology, or much else about the investment.  And one of the first rules of smart investing should be that the investor knows what he is investing in and is able to explain the investment to his spouse or good friend so she also understands.

2.      Cryptocurrency has been hyped as a solid alternative to other investments and serves as a diversifier in a portfolio, having a low correlation to the stock market.  In other words, when stocks are suffering, cryptocurrency should be thriving.  When the stock market zigs, cryptocurrency zags.  Reality says otherwise.  We all know the stock market is down these days.  Cryptocurrency is down even more.  Bitcoin, the best-known cryptocurrency, is down more than 50% from where it was just six months ago.  So much for “zagging”.

3.       The so-called mining process to create some cryptocurrencies consumes an inordinate amount of electrical power.  According to an estimate quoted in the New York Times the annual electricity consumed creating Bitcoin is more than the electricity consumption of the population of Finland.  It is not an environmentally friendly process.

4.       Think of the name.  Whether intentional or not, “cryptocurrency” seems to denote secrecy, and in fact these alternate currencies do serve to easily move money across borders with less chance of detection and easily lend themselves to use in criminal enterprises, money laundering, and fraud.

5.       Because of reasons #3 and #4 above, I suspect more and more governments are going to move to regulate or ban the mining or even the use of some or all cryptocurrencies.  We’ve already seen this happen in China.  The Biden administration has formed a study group on the topic.  And El Salvador’s launch of a national Bitcoin wallet, recognizing Bitcoin as legal tender in the nation, has proven a dismal failure.  Even with the incentives offered its citizens to use Bitcoin, one survey showed that 61% of Salvadorans had ditched their Bitcoin accounts after withdrawing the $30 incentive money that came with it.

6.       So why did so many Salvadorans abandon Bitcoin?  Maybe they felt like Warren Buffett, arguably the most famous (and quite successful) American investor alive today who said that he would not invest in cryptocurrencies because there’s nothing backing them up.  They are not investments in something that has intrinsic value, like oil, gold, a rental property, or a growing company.  As an investment, your Bitcoin is only valuable as something you can sell to someone else and only worth what the next guy is willing to pay for it—if anything.

7.       Cryptocurrencies (and they number over 17,000 now) are speculative ventures, not investments.  They remind me of the period in American history (the 1800’s) when local banks and industries issued their own currencies before the U.S. dollar became the standard with the growing strength, integrity, and backing of the U.S. government.  If the bank failed or the company folded or people just lost confidence in the locally issued currency, then that currency became worthless.  Does last week’s headline about Luna, a cryptocurrency created several years ago, remind you of that?  In 72 hours it fell 99% in value.  As one media source reported, “Twitter and Reddit were inundated with messages from investors describing how they lost most of their savings in the blink of an eye.  On Reddit, which is widely used by small investors to talk about their operations in the financial markets, many claimed to have lost tens of thousands or even hundreds of thousands of dollars in the crash.  Some of the comments expressed such desperation that forum moderators have pinned the number of suicide helplines at the top of the thread.” 

I feel that the only thing driving up the value of cryptocurrencies (when it IS going up, and not down) is FOMO—“fear of missing out”.  There has been so much hype that people are afraid they are going to miss getting in on the ground floor of the equivalent of the next Netflix or Apple stock that will turn their ten thousand dollar investment into millions.  Yes, Bitcoin has been around 13 years or so, and some people have made money.  Bernie Madoff’s Ponzi scheme operated for 17 years and at least one person made money before it all came crashing down.  As one MarketWatch reporter wrote: “Call me in four years.”

Until next time,

Roger

“When the woman [Eve] saw that the fruit of the tree was good for food and pleasing to the eye, and also desirable for gaining wisdom, she took some and ate it.  She also gave some to her husband, who was with her, and he ate it.”  Genesis 3:6 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

Tools of the Scammer

 It is in the news more and more and in warnings from the IRS, your bank, the utility company and others:  Be on your guard against scammers.

Your state’s attorney general’s office website likely has a current listing of known scams operating in the area.  The local police and your bank are also good sources for this information.  But it is impossible to keep up with all the sneaky plots to part you from your money. 

In my research I’ve discovered several common tools that fraudsters use, and being alert to them can arm you against many or even most of the plots to cheat you, even if the specifics of the schemes vary a bit.

SURPRISE: When it comes to timing, the scammer has the advantage.  He can “attack” at a time of his choosing; you have no control over that, so of course the unexpectedness of the event can set you back on your heels.  The best counter measures to this are to limit his ability to contact you.  Enroll your phone number in the donotcall.gov registry.  Cell phone companies are doing a good job of identifying spam calls so they are identified as such when your phone rings, or they are filtered out entirely.  Or simply don’t answer your phone unless you are certain of the caller’s identity.  Even a local number that you might not recognize can be dangerous since international callers can mimic a local call.  If you get an e-mail from someone you do not know, do not click on any links in that e-mail or answer a “survey”. 

PANIC: Creating a sense of danger by using words such as “lawsuit”, “judgment”, “fraud”, “final notice” will typically put the potential victim on the defensive and make him more vulnerable to poor decision-making.  Wouldn’t anybody want to do whatever he could to avoid a lawsuit, say?  The best defense is to just stop and breathe.  Don’t allow yourself to be hurried into what the scammer wants you to do.  Then, when you’ve gathered your wits and reasoning powers, think logically about the situation.  Does what the scammer is saying and asking even make sense?    If you’ve paid all your known bills, could there really be another one you owe?  And no reputable firm takes gift cards as a form of payment; that’s a giveaway.

FEAR/INSECURITY: A scammer can play on the particular circumstances of an individual—immigration status, an elderly person collecting Social Security, a grandparent—to create fear.  Threat of deportation, loss of benefits, a child in danger, can quickly cause us to lose perspective and become vulnerable to the scammer’s requests.  A proactive defense against this is to limit how much information you share on social media or elsewhere.  It’s cool that everyone knows your birthday since you posted it on Facebook, or that your grandkids are so cute since you posted their pictures online, or that you are taking your citizenship test next week since you proudly proclaimed that on Twitter.  It’s not so cool that a scammer can use that information against you.

IMMEDIACY: The supposed need to take immediate action to avoid a negative consequence ensnares many a victim.  The action requested by the scammer is typically to send money by wire transfer or gift cards (methods of payment that are difficult or impossible to reverse or recover) or simply to surrender some bit of personal information that would enable the scammer to pull off a bigger heist down the road.  For example, if he already has your date of birth, then getting your mother’s maiden name or just the last four digits of your Social Security number might be enough to steal your identity and your money later.  The best defense is to slow down the conversation; ask questions (but don’t answer any of the scammer’s questions); have them identify themselves and who they represent and get a phone number to call them back.  If he has not already hung up by then, you hang up and look up the name of the organization he gave you and call the number you find online, NOT the number he gave you (if any), if you think it is a legitimate company, and ask for customer service to inquire about the call you received and the person who made the call.

ISOLATION: There is strength in numbers, so a scammer will want to keep you from consulting anyone else about what they are saying or asking of you.  That’s why they want to create panic and demand immediate action, so you do not think to—or have time to—ask someone else what they think.  Don’t let embarrassment or fear stop you from checking with a trusted friend or family member.  Two heads are better than one.

Be careful out there.  Don’t be fearful, but do be alert.

Until next time,

Roger

“The prudent see danger and take refuge, but the simple keep going and pay the penalty.” Proverbs 22:3 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide

Should I Pay Off My Mortgage Early?

 

If you ever need evidence of financial planning being an imprecise science, just look at the difference of opinion among financial experts over whether it is best to focus on paying off one’s mortgage versus directing extra money into [other] investments.  

On one hand is the school of thought that mortgages are “good debt” and usually come with low interest rates; so rather than accelerate payments it is better to invest the money in the stock market where, on average, the percentage of gains exceeds the interest rate on the mortgage.  So make 8% (or much more the last couple of years) in the stock market with that extra $5000 rather than save 4% by using it to pay down the mortgage.  Makes sense, right?

But not so fast, says another sizable group of financial advisors.  They point out that an extra $5000 (or any large or even not so large amount) applied to a mortgage continues to offer savings in the form of reduced accrued interest month after month, year after year, and without exception.  Can the stock market guarantee you will make money every month, every year?

Both schools’ arguments always seemed to be based on anecdotal evidence.  The “invest in the stock market” group has had its day recently with the historic highs on Wall Street.  But during a recession, the “pay off the house” gang looks like the savvier of the two.  I had never seen any solid research on the numbers until recently.  MoneyGeek.com has compared mortgage rates with returns of the S&P 500 stock index over a 43-year period and found that during certain times, paying down a mortgage gives better returns than investing in the market.

MoneyGeek.com looked at numbers from 1971 to 2013 and found that in 26 of those 43 years (60%) paying down the mortgage made for a better return on the money than investing in the stock market.  Moreover, evaluating every 10-year span out of those 43 years, they found that paying on the house beat stock market returns 63% of the time.

Well what about tax savings to be realized by having a mortgage?  Why not stretch out your mortgage so you may continue to deduct the interest on income tax returns?  That argument never made sense to me.  It may marginally improve the return on investment.  But why pay $10,000 in interest this year so next April you can reduce your taxes by 20% of $10,000?  Or 25% of $10,000, or even 37% ?  Unless your tax rate is 100% (and I don’t think any of us are there….yet), you will always be paying more in interest than you are saving on taxes.

But what swings my opinion on the matter is the psychological aspect of investing and home ownership.  Yes, according to MoneyGeek.com’s research, the odds are in your favor if you apply extra money to your mortgage.  But it also has the advantage of being a guaranteed return.  That spells peace of mind versus the emotional rollercoaster ride on which the stock market takes its investors.  And I can tell you from my own experience, going into retirement without a mortgage not only provides a lot of breathing room in a household’s budget but a sense of accomplishment and peace of mind. 

Financial advice must take into account the advisee’s unique circumstances.  But typically, I believe that if you have an emergency fund of at least six months’ income set aside, are adequately saving for retirement (investing at least 10% to 15% of your income; investing at least enough to obtain your company’s full match to your 401k account, if available), and have paid off other higher interest debt, accelerating payment on a mortgage has positive returns in more ways than one.

Until next time,

Roger

 

“The rich rule over the poor; and the borrower is slave to the lender.”  Proverbs 22:7

SCOTUS Got it Wrong

“Please pick up some Special K cereal while you’re at the store.”

Okay, that’s easy enough.  Oh wait; which one?  There’s Special K with Strawberries, Special K Probiotics; Special K with Berries and Peaches, with Cinnamon, with……….

I cannot be the only one frustrated by all the choices we face in the grocery store.  From breakfast cereal to milk, from eggs to yogurt, there seems to be an endless variety from which to choose.  But despite the occasional exasperation of the shopper unfamiliar with all the choices, would we have it any other way?  I use plain Special K in a recipe.  But my granddaughter likes Special K with Strawberries.  I’m glad the store carries both.  The pandemic might end up streamlining our choices a bit as we continue to have supply chain problems, and manufacturers have been eliminating some product lines in response.  But this is the United States, home of free enterprise and endless variety.  Do we want just one flavor of yogurt?

That brings me to a recent Supreme Court decision, Hughes vs. Northwestern University.  The plaintiffs in that case, three university employees, claimed that the university failed them by offering over 400 investment options—including some they characterized as “needlessly expensive”—in their retirement plan.  This, they allege, led to participants becoming confused and making poor investment choices.

I understand the argument.  It is a well-known phenomenon that an overwhelming array of investment options can “freeze” someone who is not familiar with the ins and outs of investments, causing them to avoid investing altogether because they fear making a mistake.  But does that justify limiting everyone’s choices?  And if so, to what extent?  How many investment choices are too many?  Or too few?

Let’s take a hypothetical case and see how limiting choices might work against certain investors.

Company ABC offers a 401(k) retirement plan for its employees.  It offers a 100% match of employees’ contributions, up to 6% of their salary.  Jane Doe, age 27 and an employee at ABC, makes a salary of $65,000 per year.  She is an avid saver and somewhat knowledgeable of stocks.  She aims to save 6% of her salary this year, $3900, and looks forward to getting the $3900 match from her employer.  She firmly believes that small company stocks (“small caps”) are the best way to build wealth in the long-term, so that is where she wants to invest her money.  But small cap stock funds can be volatile, lots of ups and downs, and depending on the particular fund manager and his management style, can be a bit pricier than some other options.  Jane knows this and doesn’t care because she has a long investment timeframe; she can endure the ups and downs and can afford to ride them out.  But ABC doesn’t feel the same way.  They think it’s too risky, maybe even too expensive, and do not include any small cap options in their 401(k) plan.

In that scenario, Jane does not get to put her savings into her preferred investment vehicle.  Is the limiting of the 401(k) plan’s options serving her well?  It might be argued that she can just invest that money in small caps in her own IRA plan and doesn’t have to put it into the 401(k); but that means she has to forfeit the company’s matching money.  I’d argue that is not fair.

The Supreme Court apparently doesn’t see it the same way.  In Hughes vs. Northwestern University the court unanimously ruled that the plaintiffs had a valid argument and sent the case back to the Seventh Circuit Court of Appeals to be reconsidered.  There is still hope then that variety will win out, and Northwestern will be validated in its decision to offer more variety of investments.  But it’s a case being closely watched by employers.  After all, they do have a responsibility to their employees to help them invest wisely.  But how is this fiduciary responsibility best met? 

I contend that it is NOT by limiting investment choices but rather by educating their employees.  The employer’s best first line of defense is simply to default all investors/employees into a conservative target-date fund that is age-appropriate for them.  I believe most companies already do this—a lesson learned from past recessions when employees lost so much money in their mutual funds.  To opt out of that investment choice would then require direct action by the employee.  An investor is supposed to certify to the investment company that they have read a fund’s prospectus (a document that tells about the plan: its risks, its investment strategy, its costs, etc.—in others words, all the things the plaintiffs in the court case should have known but blamed the employer for their not knowing) before investing in that fund; but really, how many do so?  Nonetheless, the onus is on the investor. 

This is where I think employers can step in to fill that gap.  They can, for example, require employees to meet with an advisor (on company time) before they can switch their investment choice away from the default fund.  Classes on managing money or one-on-one meetings with financial advisors (again, on company time) can be offered regularly.  With employers searching for ways to retain workers, what a great perk this would be.

Education is the answer to ignorance.

Until next time,

Roger

“Then you will know the truth, and the truth will set you free.”  John 8:32 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.