Last Word on Money: October 2023

Monday, October 30, 2023

Patience is a Virtue

Though I view with suspicion any attempt to add more “required learning” onto the curricula of our schools, I tend to believe more training in personal finance is a good thing. A semester course might serve well, but incorporating finance into other subjects would also serve the purpose. For instance, instead of the standard “if two trains left the station ten minutes apart” math problem, how about a word problem that deals with comparing the interest rates at two different banks with two different types of accounts with different terms? And in senior Economics class, why not work in some material on how macro-economic trends (prime rate, money supply, etc.) affect personal finances?

But financial education can go off the rails, too. I’ve read too many stories of personal finance classes that amount to a contest to see who ends up with the most money in a stock market investment simulation. Students are given a certain amount of pretend money that they pretend to invest in real stocks and bonds, and through actively trading in these assets try to beat their peers.

I’m sure the students enjoy the competitive nature of a class that follows that format. But while that might whet their appetite for investing, it can both fuel greed and diminish what I believe is one of the most important virtues of investing: Patience

I’ve beat that drum before in this blog. We should not let the near-daily fluctuations of the market and the headline-grabbing scare stories (or unrealistically optimistic ones) about what the stock market is supposedly going to do drive our financial decision-making. Slow, steady, and patient is the mantra.

This was driven home for me even more dramatically in a recent article by Eventide Asset Management, sent to me by Faith Fi. It cited a story in the Wall Street Journal from December 31, 2009, that praised that decade’s best-performing U.S. diversified stock mutual fund, the CGM Focus Fund 2. The fund had returned a remarkable 18% average annually over those ten years. But astoundingly, the average investor in that fund actually lost 11% over that time period—all because they went in and out of the fund. It went down in value, they sold their shares. The fund went back up, they bought back. In effect, they were selling low, after the fund had lost value (and thus turned a loss on paper into an actual loss) and buying back when the price had gone back up (buying high). Missing out on just a few of the biggest single-day gains over a year’s time (or several years’ time) is enough to tank one’s net returns. Buy and hold. Find a few good mutual funds or electronic traded funds (ETF’s), invest in them regularly, and hold on to them long-term. A bunch of singles and some smart base-running will get you home as surely (or more so) as swinging for the fences.

Until next time,

Roger

“A man’s wisdom yields patience.” Proverbs 19:11 NIV*

Wednesday, October 11, 2023

For Better, For Worse, But Maybe for Richer

Still laboring under a gender wealth gap, it seems women will get the last laugh. Whether through inheritance, divorce, or simply outliving their husbands, it is estimated that single women will control $30 trillion in assets by the end of this decade, according to MarketWatch. Characterized by MarketWatch as having played “second fiddle” for years to their significant other in financial affairs, these women will essentially triple their net worth between 2020 and 2030 as they take over management of their money that in most cases had been done by their now-absent male partner.

How will they handle all that wealth? For many it will be intimidating. My own wife fears taking over managing investments if I die, although I tell her she would do just fine. She has handled financial matters in our home before and did a fine job. I know several divorcees and elderly widows who have managed quite well as singles. But I also know others who have not, who have suffered from poor decisions their husbands made, were left nearly broke from expensive divorce proceedings and a less than just settlement, or who feel completely lost around bank and investment accounts. (And to be fair, I also know widowers who have struggled with the same.) Of what pitfalls should these newly single women be aware?

First, they should learn as much as they can about Social Security. No, that is not a pot of gold they get all at once, but over time Social Security benefits amount to a substantial sum. Making wise and timely choices about that benefits program can pay huge dividends. I’ve written before about a good resource for learning more about Social Security.

A divorcee after at least ten years of marriage? Depending on if and when she remarried, she can claim benefits under the former husband’s earnings, and he doesn’t have to give permission or even know about it.

Were she and her husband both claiming benefits under their respective earnings record, then the husband died? Only the higher benefit of the two will continue; she will not collect both. This can mean a huge cut in monthly income.

A widow can collect survivor benefits from her deceased husband’s earnings record and wait until later to claim her own potentially larger benefits. (A widow can only collect one or the other; but each year she waits to collect her own benefits the monthly amount she will collect will grow by as much as 8%, until it maxes out at age 70. If she had spent a good deal of time in the workforce, by that time her own benefit may well exceed the survivor benefit.)

Did the deceased husband have a pension, and did he select dual life annuity or single life annuity? If the latter, the pension payout ends with his death. This trips up many couples who opt for the bigger monthly payout of a single life annuity, not realizing it is only bigger because the income is only guaranteed for the pensioner, not his survivor.

There are tax implications, of course. Filing single instead of married/jointly comes with a different tax rate. There is a lower threshold for determining when Social Security benefits are taxed (yes, up to 85% of Social Security income can be taxable). And living alone is more than half expensive as two living together.

Women tend to invest very conservatively, when they invest at all. This can serve them well in some situations, but it is not a reliable means to preserve or grow wealth. It is estimated that nearly 70% of women who were in a marriage/relationship in which the male partner hired a financial advisor will NOT use that same advisor after the male’s death. Hopefully that means they are searching for a more compatible advisor, perhaps a woman, who can better understand her struggles, her worries, her style of dealing with money. Believe it or not, I read an article that said men were MORE likely than women to seek financial advice. True or not, financial security can make life simpler and more enjoyable for the single woman. If she’s comfortable with her situation, has the confidence in her knowledge to handle all things financial, and has a budget that is workable and is working, that woman should do just fine. Anything less than that might well call for professional advice. Just find an advisor you are comfortable with.

Until next time,

Roger

“She is clothed with strength and dignity; she can laugh at the days to come. She speaks with wisdom, and faithful instruction is on her tongue. She watches over the affairs of her household and does not eat the bread of idleness.” Proverbs 31:26, 27 NIV*