If Our Generation Has So Much, Why Do We Feel Deprived?

The world has never been a better place to live. Despite the daily downpour of negative news, families in the United States and around the world have much to be grateful for. Especially when you compare American life in the 1950s to today. 

Consider these comparative U.S. facts1.

good ol day.jpg

Around the world, the improvements are even more profound:

· Global Poverty is Disappearing. The number of people living around the world in extreme poverty, defined as a daily income of less than $1.90 day, has declined from more than 50% in 1980 to less than 10%. 2

· Global Violence is Decreasing Dramatically. The percentage of people dying in world events fell from 3.7% in World War II to less than .01% 3

· The Global Middle Class is Rising. By 2025, more than 50% of the world population will likely be considered middle class or higher for the first time in history. There were about 3.2 billion people in the middle class at the end of 2016--500 million more than previously estimated. 4

· Greater Levels of Education Abound. The literate population has increased from 56% in 1950 to over 85% in 2018. 4

 

Gaining Perspective from the  Past

These statistics describe in simple black and white the improvements made over the decades. Yet it’s the stories from generations past that paint the full color picture of how good we really have it.

This became clear to me recently when my mother-in-law Agnes Murasko, who was born in 1929, sent our family a book of her childhood memories. Her personal stories gave me a punch in the gut to my spoiled 21st century self. 

Agnes was one of nine children raised during the Great Depression. Born to immigrant parents, her father was a coal miner who saved every penny to eventually buy a farm. Her mother, whose “hands were never idle,” raised the children and ran the home. 

According to Agnes, they had it all: a garden, chickens, an oven her father built, and a spring house that kept food cold. Her father frowned upon waste; he even straightened bent nails so they could be reused. Her mother, who was quite scrappy, used chicken feathers to make down covers for the kids’ beds. Considering that  three kids slept in each bed, it took a lot of chicken feathers to finish the task.

When the family got hungry, they couldn’t just dash over to the local grocery store. It didn’t exist. The food they ate came from their own land, and included homemade bread, canned fruit, and vegetables from their garden.

During times of celebration, the family enjoyed small indulgences. They marked special days by going to church, having friends over for cake, and making homemade wine. They reserved rare delicacies like ice cream for holidays such as the Fourth of July.

 Although they didn’t really have hobbies, Agnes and her family enjoyed riding on the porch swing her father had built, listening to the accordion and other musical instruments played by family, gathering by the radio to listen to “I love a Mystery,” and perusing the Sears Roebuck catalog with siblings. 

When the family wanted to “get away,” they didn’t take vacations, which were uncommon in those times. Instead they took day trips to Ohio or West Virginia. According to her parents, if you have “a roof over your head, food on the table, and shoes to wear, you are rich.” Following this life philosophy, her family was mostly unaware of the Great Depression despite the conditions of the 1930s. 

Running on the Hedonic Treadmill

After hearing about Agnes’s experiences, I felt extremely blessed—and a bit guilty—to live in a time where we have so much available to us. It got me thinking:  If we have so much more than previous generations, why do many of us feel deprived and de-energized as we crave for more in our lives?

Scientific studies and psychologists tell us that it largely boils down to “Hedonic Adaptation.” Also known as the Hedonic Treadmill, this is the tendency for humans to quickly return to a certain relative level of contentment, despite major positive or negative events happening in their lives. In other words, no matter what happens to you in your life, you very quickly get used to it and expect something more.  

Hedonic adaptation is helpful in harsh circumstances. On the other hand, it can lead you to misery pretty quickly if you fail to recognize it. This can cause you to spend most of your life chasing entitlements rather than appreciating what you have and pursuing the true aspects of a happy life.  

It turns out that when you jump to a new level of material convenience, you lose the ability to enjoy the previous amenities that used to impress you.

I liken it to my journey from my starter home to the one I live in now. While in my late 20s, I was thrilled to get my first condo. At 700 sq. ft., it was small, but I had my own kitchen, beautiful common spaces, and a balcony surrounded by trees. It was everything I needed at the time.

I now find myself swept up in the craze of wanting to renovate my 2,700 sq. ft. home which, by most standards, would be considered quite lovely. Both homes served the same purpose, and the pleasure was just about the same. I certainly enjoy aspects of my bigger home—like easy access to great schools--now that it houses a family of four. Yet there was also something thrilling about coming home to my condo with its simple space that required less maintenance and upkeep. 

How to Beat Hedonic Adaptation

So how do you combat that feeling of always needing more?

1 – Deprivation. Studies show that the most effective way to learn to appreciate what you have is to move down the hedonic scale, either voluntarily or involuntarily. For instance, you could deprive yourself of an entitlement. For example, by dining out less, you will gain more appreciation of the rare meal out on the town. By sticking to the reliable, no-frills, used Honda, you will garner much more pleasure from the feel of a new luxury car.

2 – Acknowledgement. It does no good to deny the fact that you, as a consumer, have cravings for more. Though it’s wise to recognize them for what they are, avoid impulse buys to fill your inner voids and focus on directing money and time to those things that really bring you long-term contentment.

3 – Happiness. Scientists have discovered that a happy life comes from sources like meaningful work, a private life, community, health, freedom and a life philosophy. When you focus more on these elements than on what you feel entitled to, odds are that your happiness levels will increase.

4 – Perspective. Consider history and family stories as a guide to reminding you just how much you really have. Anecdotes from the past offer insight into what defined a happy life in decades past and those things you have in common that still provide long-term happiness. 

5 – Knowledge. Lastly, an information diet could serve as a happiness boost. Instead of listening to the daily drama on TV, radio or the internet, read a good book or a study about how far we as a global society have come.

In the end, the good ol’ days are really just a matter of perspective. While we live in in a world that offers great convenience and material wealth, it’s important to keep in mind what is truly important to live a happy life. If you can learn to appreciate what you have, rather than constantly seek out the next best thing, you may discover that you already have more than enough.

 

Sources:

1.        Moore, Stephen and Simon, Julian L. (2013, December 13). It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years. Federal Reserve Bank of Boston, Statistical Abstract of the United States, International Labor Organization, United Nations, Bureau of Labor Statistics.

2.        World Bank. (2017). Retrieved from Ourworldindata.org. Dollars adjusted for currency and inflation.

3.        Oppenheimer’s Compelling Wealth Conversations 2018, pg. 63, where they cite 2013 Statistics on Violent Conduct.

4.        Brookings Institute. (2012). Middle Class data. Retrieved from https://www.brookings.edu/wp-content/uploads/2017/02/global_20170228_global-middle-class.pdf. The middle class has been defined by myself and many others, before and since, as comprising those households with per capita incomes between $10 and $100 per person per day (pppd) in 2005 PPP terms (Kharas, 2010; World Bank, 2007; Ernst & Young, 2013; Bank of America Merrill Lynch, 2016). This implies an annual income for a four-person middle-class household of $14,600 to $146,000.

 

 

Lessons From My Investing Past

Lessons from my Investing Past

By Shelley Murasko

Whether we are willing to admit it or not, we have all made investing mistakes. How we define “investing mistake” is certainly in the eye of the beholder. I consider an investing mistake to be one where for a prolonged period of time, say more than 3 years, I dedicated a sizeable sum of money (more than $5000) towards an idea that trailed the performance of other available options within my reasonable, age-appropriate purview. Fortunately, I have generally not been an individual stock picker or market timer; nonetheless, I have erred in my investing ways and share these lessons in hopes that they can make a difference in your financial life.

If I were to go back and do it all over again, I would have avoided the following mistakes:

1.     Investing in a mutual fund where I paid a 5.75% load (upfront) fee for many years while I could have been investing in a low cost, better performing index fund.  In general, I should have had my eye on investment fees at a much earlier age! Fees within mutual funds can be like termites nipping away at your retirement dreams, and eventually the house caves in!

2.     At a young age, investing a large part of my 401K in a bond fund.  In my first post-college job, Human Resources presented a list of 401k investment choices, and with little to no research, I invested in a bit of everything. Fast forward a few years, I learned that this “buffet” approach to investing is NOT DIVERSIFICATION. Although bonds can be helpful, they play a specific role in protecting cashflow needs that my risk tolerance and timing did not dictate at my young age.

3.     Lastly, largely ignoring small cap, value stocks.  I did not realize the potential for enhanced returns as well as broader diversification by over-weighting small cap, value stocks in my portfolio.

In this piece, let’s explore the small cap, value over-weighting idea a bit further.

Over the past 20 years, U.S. small cap, value companies as a collection have outperformed the large cap S&P 500 index by 4.6%.1.  Where the S&P 500 during that time delivered an annualized average return of 7.2%, the Dimensional Small Cap, Value index, tracked to an 11.8% average annual return. 

Granted this outperformance does not come without a catch.

For starters, investing in the small cap, value index fund requires a greater tolerance for volatility. The small cap, value index has had two additional negative performance years during the 20-year timeframe and about a third more volatility.

Second, the US small cap, value company collection did not track evenly with the S&P 500. In some years like 1998, the large cap S&P 500 soared at a 29% return while the small cap, value companies plunged a negative 6%. Therefore, an investor would have had to stomach not only volatility but also vast deviation from the more commonly followed large cap stocks.  
 
Four additional percentage points on average return may not sound too sexy. As calculated on an original investment of $100,000 over 40 years, we are talking about a difference between $6.5 Million vs. $1.5 Million over that time frame. Though one probably wouldn't invest exclusively in a small cap, value fund, it is clear that its inclusion could make a significant different at retirement age.

What’s the best way to incorporate small cap, value stocks? While Benjamin Graham in The Intelligent Investor wrote the book on value investing, and Warren Buffett showed us how valuable “value” investing can be, Dimensional Fund Advisors under the guidance of Eugene Fama and Ken French, Nobel prize winners for their work on small cap, value research, have created what may be considered the top mutual funds, which allow everyday people to take part in this style of investing. 

Haven’t heard of Dimensional Funds (DFA)? It’s probably because you generally can’t access them unless they are part of a 401k, 529 plan or through an investment advisor.  In addition, you won’t see DFA wasting their dollars advertising during the Super Bowl. Like Vanguard, they promote low cost investing. Even Vanguard has increasingly offered small cap, value index funds and recently launched new broad US stock funds with a small cap value tilt much like DFA.  

Small cap, value investing is not for everyone. For those with a short time horizon or an undisciplined investing past, BUYER BEWARE! For those sophisticated investors who have demonstrated a disciplined investing past, learning more about investing in small cap, value style might prove advantageous.

Before you jump in wholeheartedly to a small cap, value stock index fund, it behooves you to understand how finicky the small cap and value “premiums” can be.

Small cap, value stocks over the past 5 years have trailed the large cap stocks by 1%.  There have been several long time periods, at times 10 years or more, where the premiums are not expressed.  

Highlighted in the article reprinted below by Weston Wellington, Vice President at DFA, you can learn more about one of the most treacherous time periods for the value premium.   

Enjoy this reprinted article from DFA’s website (
https://us.dimensional.com/) :

A Vanishing Value Premium? By Weston Wellington, January 2016

Value stocks underperformed growth stocks by a material margin in the US last year. However, the magnitude and duration of the recent negative value premium are not unprecedented. This column reviews a previous period when challenging performance caused many to question the benefits of value investing. The subsequent results serve as a reminder about the importance of discipline.

Measured by the difference between the Russell 1000 Growth and Russell 1000 Value indices, value stocks delivered the weakest relative performance in seven years. Moreover, as of year-end 2015, value stocks returned less than growth stocks over the past one, three, five, 10, and 13 years.

Unsurprisingly, some investors with a value tilt to their portfolios are finding their patience sorely tested. We suspect at least a few will find these results sufficiently discouraging and may contemplate abandoning value stocks entirely.


Total Return for 12 Months Ending December 31, 2015

Russell 1000 Growth Index

 5.67%

Russell 1000 Value Index

−3.83%

Value minus Growth

−9.49%

Before taking such a big step, let’s review a previous period when value strategies underperformed to gain some perspective.

As many growth stocks and technology-related firms soared in value in the mid- to late 1990s, value strategies delivered positive returns but fell far behind in the relative performance race. At year-end 1998, value stocks had underperformed growth stocks over the previous one, three, five, 10, 15, and 20 years. The inception of the Russell indices was January 1979, so all the available data (20 years) from the most widely followed benchmarks indicated superior performance for growth stocks.

To some investors, it seemed foolish for money managers to hold “old economy” stocks like Caterpillar (−3.1% total return for 1998) while “new economy” stocks like Yahoo! Inc. appeared to be the wave of the future (743% total return for 1998).

Many value-oriented managers counseled patience, but for them the worst was yet to come. In 1999, growth stocks shone even brighter as value trailed by the largest calendar year margin in the history of the Russell indices—over 25%.


Total Return for 1999

Russell 1000 Growth Index

 33.16%

Russell 1000 Value Index

 7.36%

Value minus Growth

−25.80%


In the first quarter of 2000, growth stocks bolted out of the gate and streaked to a 7% return while value stocks returned only 0.48%. As of March 31, 2000, value stocks had underperformed growth stocks by 5.61% per year for the previous 10 years and by 1.49% per year since the inception of the Russell indices in 1979.

A Wall Street Journal article appearing in January profiled a prominent value-oriented fund manager who regularly received angry letters and email messages; his fund shareholders ridiculed him for avoiding technology-related investments. Two months later he was replaced as portfolio manager amidst persistent shareholder redemptions.


With value stocks falling so far behind in the relative performance race, it seemed plausible that value stocks would need a lifetime to catch up, if they ever could. It took less than a year.

By November 2000, value stocks had delivered modestly higher returns than growth stocks since index inception (21 years, 11 months). By month-end February 2001, value stocks had outperformed growth over the previous one, three, five, 10, and 20 years and since-inception periods.

The reversal was dramatic. Over the period April 2000 to November, value stocks outperformed growth stocks by 26.7% and by 39.7% from April 2000 to February 2001.

This type of result is not confined to the technology boom-and-bust experience of the late 1990s. Although less pronounced, a similar reversal took place following a lengthy period of value stock underperformance ending in December 1991.

We can find similar evidence with other premiums:

• From January 1995 to December 1999, the annualized size premium was negative by approximately 963 basis points (bps), amounting to a cumulative total return difference of approximately 113%. Within the next 18 months, the entire cumulative difference had been made up.

• From January 1995 to December 2001, the annualized size premium was positive by approximately 157 bps.

The moral of the story?

Prices are difficult to predict at either the individual security level or the asset class level, and dramatic changes in relative performance can take place in a short period of time.

While there is a sound economic rationale and empirical evidence to support our expectation that value stocks will outperform growth stocks and small caps will outperform large caps over longer periods, we know that value and small caps can underperform over any given period. Results from previous periods reinforce the importance of discipline in pursuing these premiums.

This article by Wellington highlights the importance of staying disciplined. The premiums associated with size and value may show up quickly and with large magnitude. There is no guarantee that the size or value premium will be positive over any period, but investors put the odds of achieving augmented returns in their favor by maintaining constant exposure to these dimensions of higher expected returns.

There are many ways to pursue the small cap, value premium.  Whether it is DFA, Vanguard, or the hundreds of other firms offering small cap, value funds, an investing advantage may be the result if done with great patience and discipline. As with most investing decisions, one must know thyself. For those looking for some guidance in this area, Wealthspring Financial Planners is here to help.

1.      S&P 500 index 20 year performance, Dimensional Fund Advisor Matrix Book 2018, “Historical Returns Data-US Dollars”, p.15. Dimensional US Small Cap, Value Index 20 year performance, Dimensional Fund Advisor Matrix Book 2018, “Historical Returns Data-US Dollars”, p. 39. Dates: 1998-2017.

2.      Wei Dai, “Premium Timing with Valuation Ratios” (white paper, Dimensional Fund Advisors, September 2016).

3.      Size premium: the return difference between small capitalization stocks and large capitalization stocks. Value premium: the return difference between stocks with low relative prices (value) and stocks with high relative prices (growth). Profitability premium: The return difference between stocks of companies with high profitability over those with low profitability.

 

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks. 

Wealthspring Financial Planners is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

 

Retire by 30 While Living Your Best Life

While two-thirds of Americans struggle to retire by 65 with less than 1 times their annual spending saved 1., groups are forming of early retirees who are calling it quits after saving 25 times their annual spending.

The FIRE (Financial Independence, Retire Early) groups are those opting out of the traditional workforce after only 10-20 years of employment, having saved enough money to cover living expenses through passive income and / or a less than 4% drawdown on their investments. They typically define financial independence as the freedom to pursue varied interests without the need to make a full-time salary.  Most emphasize that not only do their frugal habits lead to financial freedom, but that their lifestyle choice also packs in more pleasure and coolness than the standard way of high-consumption living.

Ironically, many of these early retirees still earn money through their blogs or podcasts, but they do these projects strictly for pleasure. The average age of many in the FIRE communities is 35, and the majority of these folks are former engineers, computer scientists, and other professionals who once earned close to six-figure salaries.

Rather than living like typical Americans spending 95% of their take home pay, they jumped off the work-spend-work treadmill by saving 50%+ for approximately 10 years or more. With annual budgets typically between $30,000-50,000/year, they spend less than approximately two-thirds of U.S. households despite their household incomes in excess of $100,000.

So, how do they do it? Below I highlight three of the top FIRE thought leaders and their habits and beliefs around top spend categories: housing, cars, health insurance, travel, and food. At first glance, some of these concepts may seem over the top. While you may not agree with these masters of frugality, one good idea might spur you on to improving your spending and, ultimately, your life.

First, let’s meet the experts:

Mr. Money Moustache

Pete Adeney and his family of three retired by the age of 30 from tech jobs in the Boulder, Colorado, area. He is now a blogger with over 1 million followers, owns a co-working space where his cult following gathers, and leads the way in insisting that living inexpensively means living your best life while lessening your negative impact on the planet. His motto: Early Retirement through Badassity. Through his most popular post, “The Shockingly Simple Math Behind Early Retirement,” Pete preaches that you only really need to save 25-30 times your annual spending to be financially free and that this can be done in about 10 years with a 65% savings rate. 

ChooseFI

Brad Barrett and Jonathan Mendonsa are frequent podcasters with their show ChooseFI. On the path to retire early from accounting and pharmacy, respectively, both are married with families. Jonathan clawed himself out of $168,000 in student loans in four years and is now on the path to retire early.  Self-described geeks, both men preach smart financial strategies without having to live in deprivation or unhappiness.

The Frugalwoods

Mrs. Frugalwoods, Elizabeth Thames, is part of a young Boston couple with two kids. She and her husband saved more than two-thirds of their income, so they could retire to a homestead in the Vermont woods before their 35th birthdays. Elizabeth is the author of the well-regarded book, Meet the Frugalwoods: Financial Independence through Simple Living.

Here’s what they teach:

Housing

Mr. Money Mustache:

·        Choose your home as if cars don’t exist. Live near public transit or within biking / walking distance, so you can cut the high costs of transportation, which typically is in the top 3 expenses for most Americans.

·        Right-size your home. Purchase what you need without wasted space. Pete recommends 2,000 sq. feet or less with access to affordable homes near nature and good schools as priorities.  

·        Consider a fixer-upper. Properties that need a little work are great if you have the skills to do renovations yourself. Plus, you can add desired amenities like the music studio / home office Pete built behind his home overlooking a beautiful park.

·        Pay off your mortgage early. The majority of FI-ers have eliminated debt because they make an effort to pay them off early. You can too.

ChooseFI:

·        Realize that location matters. Choose a low-cost home in an affordable place like Virginia (where podcasters Brad and Jonathan live).

·        Buy a multi-unit residence. When possible, house hack by purchasing a duplex or triplex. Then live in one unit while renting out the others.

·        Pursue minimalism. From a home purchase standpoint, less is more. Recognize that more rooms can actually reduce happiness when you have to furnish, heat, repair and clean them.

Mrs. Frugalwoods:

·        Educate yourself before you buy. Shop open houses to find the house you really want at the best deal. (The Frugalwoods went to over 270 open houses before buying their first home in Boston).

·        Favor “fixable” flaws. Search for homes with “fixable” flaws that cause sellers to price their properties low.

·        Prioritize the quality of schools and community. Make sure your new home is close to nice grocery stores, farmers’ markets, and other simple pleasures.

Transportation

Mr. Money Mustache:

·        Stay close to home. Make sure your residence is within 10 miles of your work, and then preferably bike or walk there where you can also boost your physical fitness along the way.

·        Opt for practical over pricey. Buy a 10-year-old, fuel-efficient, reliable, utilitarian car for $10,000 or less with cash. Specific models suggested include: Toyota Prius, Mazda 3, Mazda 6 (as a family car), Honda Fit and Toyota Yaris.

ChooseFI:

·        Go for “used.” In order to achieve the lowest cost of car ownership, choose a 10-year-old econo-hatchback, which has an annual cost of ownership of $5,000/year compared to $30,000/year with a new car.

·        Avoid car payments. Continue to drive the car you own for as long as you can to prevent a new car payment until absolutely necessary.

Mrs. Frugalwoods:

·        Say “no” to new cars. Buying a brand new car is one of the worst financial decisions a family can make (unless you are a billionaire).

·        Target the sweet spot. The best option is to buy a used car that is 5-6 years old. Be sure to take a test drive before you purchase and conduct research on sites like CarGurus.com.

Healthcare

Mr. Money Mustache:

·        Prioritize your health daily. Be selective about what you eat and follow a daily fitness regime. The healthier you are, the lower your medical bills will be.

·        Use your health insurance sparingly. If you maintain optimal health and do not have any chronic health issues, then choose the lowest cost insurance with the highest deductible and use your insurance only when necessary.  

·        Take advantage of deductions. Check to see if you can deduct insurance premiums or other health costs from your taxes.

ChooseFI:

·        Seek out subsidy options. If your only option is to enroll in the federal healthcare, work to reduce your taxable income through shelters, deductions, and credits to make you eligible for subsidies--up to $45,000 /year for singles and up to $95,000/year for families.

·        Exercise part-time insurance benefits: Consider a side-gig with a company where working part-time gives you health insurance until eligible for Medicare at age 65.

·        Use cost comparison tools. Be sure to price-compare procedures that you will need by using your health insurance company’s cost comparison tool. Just input the care you will need (i.e., MRI, X-ray, specific surgery, etc.) along with your zip code. The program will then spit out a listing of facilities and /or providers and their average costs. The tool may even list patient satisfaction ratings of the providers.

·        Shop for prescriptions. To find the best prices, use this tool: GoodRx.com. Input your prescription, dosage and zip code and voila! You’ll get a listing of pharmacies within a certain radius of you and their cost for your specific prescription.

·        Ask about coupons. Many people don’t know that the drug manufacturers often issue coupons for high-cost prescriptions. Find and use them to save even more.

Mrs. Frugalwoods:

·        Be an underdog. Aim to keep income lower than thresholds necessary to qualify for government subsidies. Simply withdraw from Roth IRAs after 5 years or brokerage accounts, which are tax favorable.

·        Work for the benefits. Have one spouse continue working part-time and / or remotely in order to get insurance through his or her company.

Food

Mr. Money Mustache:

·        Take nutrition seriously. Cook at home more often, eat more veggies and reduce intake of meat and bread. Avoid convenience foods and anything with sugar.

·        Eat in more often. Save eating out for celebrations as restaurant food is more expensive, time-consuming, and unhealthier.

·        Buy in bulk. Target items with long shelf lives, developing your own personal top ten items to buy at Costco. This ensures you get the lowest cost per unit on your key items. Pete’s personal list includes: coffee, olive oil, pasta, pasta sauce, oatmeal and various fruits / veggies.

ChooseFI:

·        Entertain at home. Choose eating at home with friends over eating out. You get to treat your friends to a tasty home-cooked meal while avoiding the high restaurant bill.

·        Buy in season. Foods are less plentiful out of season and, thus, more expensive to buy. You can get good bargains on in-season foods because they are more readily available.

·        Keep emergency meals in the freezer. This tip can be a lifesaver for times when you are rushed. Quick but healthy meals like Trader Joe’s orange chicken are a good option.

·        Double recipes when you cook. Stretch them even further by eating the leftovers so that three to four meals cover seven days.

·        Buy your 10 key staples in bulk. When you do, you’ll get a price break and always have your favorite foods on hand. Jonathan’s key staples include: potatoes, cereal, onions, frozen chicken breasts, frozen berries, and flour to make homemade bread.

Mrs. Frugalwoods:

·        Plan your meals weekly. This saves you time, money and energy ... and simplifies your life.

·        Rarely eat out. For the Frugalwoods, living in the woods of Vermont makes that easier. But no matter where you live, you can save money and eat well with a little meal planning.

·        Limit pricey foods. Meat, dairy, and processed foods tend to be two to three times the cost of healthier options. Eat them sparingly and opt for lower cost, nutrition-packed items instead.

Travel / Other

Mr. Money Mustache:

·        Invest in yourself. Maintain your own car, body, garden, and home instead of paying others to do the work for you.

·        Find fun at the library. Today’s public libraries don’t just loan books. They are bona fide entertainment sources, offering activities like art fairs and science exhibits to free movie showings and reasonably priced concerts.

·        Look to nature.  Make the outdoors  your primary source of recreation and peace. Camping, hiking, and boating and touring national parks all offer their own unique brand of fun.

·        Invest in people. Cut out TV watching and car commuting. Use this time instead for group activities, entertaining, and volunteering.

·        Choose vacations rich in experience. Try camping in the mountains, exploring a nature preserve, or backpacking through the wilderness. Internationally, live like the locals, travel from country to country via public transit, or explore ancient architecture and museums.

ChooseFI:

·        Tap into credit card benefits. Use rewards / sign-up bonuses on credit cards to cover most of your travel costs.

·        Try ChooseFI’s top pick. Chase travel rewards includes two Southwest Airlines cards to enable free Southwest flights for one person all year round.

Mrs. Frugalwoods:

·        Borrow or buy used items. Ask friends, family or neighbors if you can borrow items you use sparingly, like power tools, camping supplies or wheelbarrows. You can also buy gently used items online or at garage sales, which is a smart option for items your kids will grow out of quickly like clothes and toys.

·        Start a “Buy Nothing” chapter. You can save money and the environment by “gifting” items you’d like to give away, lend, or share with others in your area. The worldwide “Buy Nothing” social movement encourages sharing and community while helping to reduce the overproduction of unnecessary goods.

·        Exploit the purchasing power of Amazon. You can buy practically anything on Amazon these days. Use it to get the best deals on items like books, tools, clothing, music, electronics, food and more.

While quitting the workforce at a young age may not be for everyone, most people can benefit from the idea of spending their money in a more optimal way … less on wasteful stuff, more on learning, giving and fun. The Financial Independence sub-culture has a great deal to offer on the subject of improving costs while designing a more adventurous, fun-filled life. Whether you are trying to break free of the 9 to 5, firm up a secure retirement, or just looking to save a few bucks, the FIRE message might be just the wake-up call needed for improving your finances and more.  

1. National Institute of Retirement Security. March 2015. “The Continuing Retirement Savings Crisis.” https://www.nirsonline.org/reports/the-continuing-retirement-savings-crisis/

Key Takeaways From 2018 Berkshire Hathaway Annual Meeting

Nicknamed the “Woodstock for Capitalists,” this year’s annual Berkshire Hathaway Annual Meeting drew 42,000 attendees from all 50 states and several countries.

The two stars of the show were Warren Buffett—the 87-year-old investment “Wizard of Omaha” —and 94-year-old master investor Charlie Munger, who has been Buffet’s co-pilot since about 1975. The pair’s zest for American business combined with their one-line zingers and jewels of investment wisdom made for a meeting that was both informative, inspirational and, at times, hilarious.

Throughout the five hours of Q&A, where journalists and audience members peppered Buffet and Munger with tough questions, four main themes surfaced.

Theme #1: Investing Principles

Patience – Buffet started off the day with a story about the first stock he bought at age 11 in 1942: Cities Service, an oil service company. At the time, the world was in the throes of an unprecedented world war and America had joined forces.

Buffet carefully researched and then purchased six stock shares at $38 a share for himself and his sister. Immediately, he saw it decline 30%. While his sister urged him to get out, he patiently waited to sell it once it recovered a few months later at $40 a share. He then had the unpleasant experience of watching the stock rise to $200 a share without him.

From this experience, he learned a valuable lesson that has become a tenet of his investing philosophy: buy good companies with competitive advantages and strong intrinsic value, hold them forever, and don’t watch the markets too closely.

Wide Moats – Emphasized repeatedly throughout the meeting was the importance of buying good businesses, at a great price, with wide moats. A wide moat means competitors have a long distance to swim across alligator-infested waters in order to overcome a company’s competitive advantage, such as its robust brand strength, product stickiness or low-cost production methods.

At one point, Buffett was asked about Elon Musk’s recent comments criticizing his “moat” economic principle. In response to the Tesla Motors CEO’s opinion that “moats are lame” because they can be squashed by innovation, Buffett asserted that competitive advantage moats should be defended. He added that he doesn’t believe Musk will take them on in candy (since Berkshire’s See’s Candy enjoys an especially wide moat with its brand power).

Munger said, “Elon says a conventional moat is quaint, and that's true of a puddle of water. And he says that the best moat would be to have a big competitive position, and that is also right. Warren does not intend to build an actual moat. Even though they're quaint.”

Intrinsic Value – Buffet recommended investors buy businesses where return comes from the cashflow promise each year rather than the hope that someone will buy it for more in the future.

He used the example of gold where, in 1942, one could have invested $10,000 that would now be worth $400,000. In contrast, that same $10,000 in the broad U.S. stock market would be worth $51,000,000 today. In fact, Buffet emphasized, you wouldn’t have even had to pick the top stocks; you could simply buy a low-cost U.S. stock index fund. 

On Bitcoin investing, Buffet again pointed out the inherent risk of investing in something that is only worth what someone else will pay for it in the future. He doesn’t like it.

Munger doubled down with this line, “I like cryptocurrencies a lot less than you [Buffet] do. And so, to me, it's just dementia. And I think that people who are professional traders that go into trading cryptocurrencies, it's just disgusting. It's like somebody else is trading turds and you decide I can't be left out.”

What Counts Most – When it comes to investing, Buffet contended that what matters most is a philosophy you can stick with. In his early days of investing, Buffet found Ben Graham’s system. Taught to him at Columbia Business School and explained in Graham’s book The Intelligent Investor, it was an approach he could believe in and follow consistently. Then he met Munger, who broadened his thinking to a system that doesn’t put primary importance on buying companies only when they are ridiculously cheap.

At the core of what these men do, however, is a fairly objective recipe. They know the ingredients that are going to work in an investment: a wide moat, intrinsic value and a fair price. They also make sure to strike in their circle of competence—industries and businesses they know.

Quipped Buffett, “We want products where people feel like kissing you, not slapping you.”

Lastly, the pair also emphasized how they typically won’t acquire another company unless the management approaches them and has a commitment to continue serving, unlike most venture capital or hostile takeovers so common today.

Theme #2: Business Challenges of Today

Trade War with China - Buffet is optimistic that the U.S. and China will avoid a serious conflict on trade and that there will be a win / win among the two business super powers.

"I don't think either country will dig themselves into something that precipitates and continues any kind of real trade war," Buffet said at the shareholder meeting. "There will be some back and forth, but in the end, I don't think we'll come out with a terrible answer on it."

Specifically, Munger stated, “The conditions in steel were almost unbelievably adverse to the American Steel industry. Even Donald Trump can be right about some of this stuff.”

Munger also pointed out that we used to be more balanced between our imports and exports as a percent of Gross Domestic Product. Now there is a gap of 3.5% which implies that foreign entities have more money to invest in the United States than we have to invest in them. What effect does all this have on American workers? Trade deficits, even in times of strong growth, have negative, concentrated impacts on the quantity and quality of jobs in parts of the country where manufacturing jobs diminish. In addition, a trade deficit can have a role in producing financial-market bubbles and the devastation that’s caused when those bubbles burst. Thus, trade deficits do matter and should not be ignored.

On Healthcare - A number of questions came up about Berkshire’s collaboration with Amazon and Chase to improve their own health insurance costs. Buffett stated, “In 1960, the average healthcare spend per capita was $170, whereas now it is $10,000 a year.” He feels that it is a hugely non-competitive factor, a “tapeworm on American business.”

Munger pointed out that improving the current system is nearly impossible. “I suspect that eventually, when the Democrats control both houses of Congress and the White House, we will get a single-payer medicine, and I don’t think it’s going to be very friendly to many of the current PBMs (pharmacy benefit managers).”

Also, Munger mentioned that there is a past precedent for business jumping in to improve healthcare. He referenced John D. Rockefeller, who partnered with Carnegie Mellon, to push healthcare institutions to revamp, standardize, and centralize their institutions in the early 1900s.

The next step for Berkshire’s collaborative with Chase and Amazon is to hire a CEO to run the new healthcare company.

Theme #3: On the Future of Berkshire

The Q&A started off with a question from journalist Carol Loomis: “Is Buffett semi-retired?” After all, he shares his investment responsibilities with portfolio managers Ted Weschler and Todd Combs, and he just promoted Ajit Jain and Greg Abel to new jobs overseeing Berkshire's operating businesses.

"I've been semi-retired for decades," Buffett said. But he points out that Weschler and Combs oversee about $25 billion in stock investments, while Buffett himself is responsible for tens of billions more in stock and bond investments and about $100 billion in cash.

According to Buffett, nothing’s really changed that much since the recent promotions. "I think, actually, semi-retired probably catches me at my most active point."

At that, Munger joined in with a zinger: "Buffet is very good at doing nothing."

Next, an analyst asked whether Buffett's successors can continue Berkshire's record of throwing lifelines to struggling companies in exchange for very good returns. (Berkshire helped companies such as Goldman Sachs, General Electric and Bank of America in the years following the financial crisis.) Part of the appeal to those companies is Buffett's seal of approval, after all.

Buffet said that, even today, some of Berkshire's investments are arranged by portfolio managers Ted Weschler and Todd Combs, not by him. In fact, there's a deal under consideration right now that either Weschler or Combs brought to his attention.

"I do not think the party on the other side is going to care about the fact that they had him on the phone rather than me," Buffett said. "We will continue to have our standards of what we think money is worth at any given time. And Ted and Todd think just as well about that as I do."

Munger added, “Those of you who, after we are gone, sell your Berkshire stock and do something else with it, I think are going to do worse. So, I would advise you to keep the faith.”

Theme #4: General Life Advice

Continue Learning - Both investing titans mentioned quite a few times the importance of learning.

Munger quipped, “If you stop learning, you become a one-legged man in an ass kicking contest.”  

In nearly every meeting, Buffett refers to one book that changed his life — Benjamin Graham's The Intelligent Investor.

"All of the important ideas are in that book," he told shareholders. Specifically, he advised the audience to read chapter eight on short-term market fluctuations, which underpins one of Buffett's most successful investing philosophies: Sell when others are greedy and buy when others are fearful.

Buffet and Munger are the ultimate role models in the quest for lifelong learning. How else would these two inspirational and successful business figures talk off script for five hours at their late ages with such wit and intellect?

If you want to learn more, go to https://buffett.cnbc.com, an amazing site that has all of the past Berkshire meetings recorded.
 

8 Habits for Building Wealth and Health

From working out at the gym and eating right to spending less and budgeting more effectively, millions of people set New Year’s resolutions each year with the goal of improving their fitness and finances. In 2018, why not commit to a resolution that can improve both your health and your wealth? 

 

Here’s a list of eight habits that might just make a difference in both your wallet and your waistline.

 

#1 – Get out your bike

 

The bicycle is a health- and wealth-optimizing machine. Where else can you burn 500 calories while saving $10 an hour1? 

 

Imagine your hard-core self passing others up as you dash down the street to get to the post office or library as others parade around in their gas guzzling, racing cages.  

 

A British study of 263,450 subjects took a comprehensive look at the health benefits of bicycle commuting, and the results were staggering. Over the course of the study, the subjects who rode bikes had a 41 percent lower chance of early death on average than those who didn’t.2

 

“Cycle commuters had a 52 percent lower risk of dying from heart disease and a 40 percent lower risk of dying from cancer. They also had a 46 percent lower risk of developing heart disease and a 45 percent lower risk of developing cancer at all,” the study’s authors wrote.

 

If there were a pill out there that cut our risk of these horrible diseases by nearly half, we’d be all over it. And yet many of us have bikes in garages doing nothing but collecting dust.

 

Need more proof that cycling is good for you? Consider the case of Jean Louise Calment of Arles, France.3 She lived until age 122—despite her indulgences in smoking, port wine and chocolate consumption—and  

is on record as the longest living person ever. One of her longevity secrets was cycling, an activity she pursued until she was 100.

 

 

#2 – Cut the cable cord

 

Want instant savings on a big monthly fee? Cut off your cable. You could reduce your annual expenses by $2,000, not including energy costs. In addition, people who forego traditional TV see at least 10,000 fewer ads each year—ads which subtly nudge consumers back to the store to buy more stuff4—resulting in lower spending.

 

In the Men’s Fitness article, “Watching TV All Day Is Pretty Much Gonna Kill You (If It Doesn’t Rot Your Brain First),” the author cited that “alarming new research suggests that couch potatoes don’t just have to worry about obesity, heart disease, and cancer (which we knew about already). Tuning in for hours at a time also increases the danger that you’ll die from even more diseases, many of which are among the leading causes of death in the U.S.—things like diabetes, influenza/pneumonia, Parkinson's disease, and liver disease.”5

 

As an even bigger bonus, non-TV watchers naturally burn more calories with alternative activities. A New York Times article reported on a study that confirmed a group who “watched less television moved more, burning an average of 120 calories more a day than the control group.”6

 

#3 – Stay in for lunch

 

Not only is going out for lunch every day a huge time waster, it’s also a real crunch on your wallet and your waistline. 

 

From a monetary standpoint, a single lunch can set you back as much as $20 once you factor in the cost of restaurant food plus gas. Bringing your own lunch is significantly cheaper.

 

Plus, when making a lunch to take to work, you’re more likely to choose healthy food items like salads or meat and vegetable leftovers from the previous night’s dinner.

 

In a restaurant, it’s often hard to resist pizza or a hamburger, not to mention a side of fries. One way to ensure healthy-eating habits stick is to cook an extra serving at dinner that you can use for the next day’s lunch.

 

In the past, one of my colleagues used to cook a large batch of his favorite chili recipe once a month. This allowed him to eat lunches practically free for the next 30 days. Another option is to stock up on pre-made salads, soups, or veggie wraps from your local grocery store.

 

#4 – Cook at home

You can also improve your body and your bank account by cooking at home more often and eating out only on special occasions. When you cook for yourself, you tend to take nutrition more seriously. Consider working up a meal plan that allows you to choose more veggies, limit meat and bread, avoid convenience foods, and minimize sugar.

 

Challenge your creativity and internet research skills to come up with 10 new favorite recipes that pump up your nutrition and relieve your grocery budget. Websites like http://www.5dollardinners.com/ or http://www.frugallivingmom.com have hundreds of ideas to share.

 

#5 – Get in touch with nature

Make nature your primary source of recreation and peace. As author and naturalist John Muir once said, “In every walk with nature one receives far more than he seeks.”

Whether it’s walking the nearest canyon or hiking a trail, local communities offer dozens of free nature opportunities. When the kids are begging you to hit Legoland, plan a trek instead.  

Most city parks also have playgrounds that provide an excellent free resource to families and help develop childrens’ social skills.

Some national parks are free and others charge a fee depending on what your plan is. The fee isn’t much compared to what you gain from venturing around our beautiful landscapes and enjoying Mother Nature.

 

#6 – Tackle your own tasks

 

Our society has grown more service oriented since the 1950s. The casualties of our convenience culture are the calories once burned mowing the grass or cleaning the house. A great deal of money can be saved by clipping your own hedges and folding your own laundry. Unsure of how to get started on doing your own household tasks? Turn to YouTube for millions of “how to” videos from mopping the floor to cutting the hedges.   

 

#7 – Walk to work

 

Reinvent your commute by walking the final mile. Whether it’s finding the furthest parking spot in your company lot or parking a mile before you get to work, there are many ways to add walking to your daily routine.

 

If you really want to step it up, buy a fitness tracker to measure how this subtle change increases your steps, then work on stepping it up each week. For every couple of miles walked, you burn 200 calories and save about $2. If $2 doesn’t sound like much to you, consider the compounding effect of $2 a day over 20 years. At an 8% return, that small amount can add up to $36,000.

 

#8 – Add fitness to your day

 

Join a fitness class or craze that lights up your day. Even if your program costs $100 a month, the return in fewer sick days and medical bills over your lifetime could well be worth it.

 

Avid exercise enthusiasts save quite a bit on healthcare. According to an article in Shape, 30 minutes of moderate-intensity aerobic activity (like walking or mowing your lawn) five days a week, or at least 25 minutes of vigorous aerobic activity (like running, swimming, or aerobics) three days a week—or a combination of the two—can save on doctors’ bills.

 

The surprising result? The study found that people who met these goals saved on average $2,500 in health costs each year.7 As medical costs continue to soar, this savings could make a big difference in your family budget.

 

Whatever you decide to attempt for 2018, remember that it takes 21 days to form a new habit. So, what’s the best way to get a new habit to stick? Write down your progress on a daily basis. If you can devote just five minutes each day to this activity, you’ll create a habit that delivers big benefits in the coming months.

 

 Here’s to more wealth and health in 2018!

 

 

Sources:

 

1. Jonathan. (May 8, 2017.) The True Cost of Car Ownership. Retrieved from https://www.choosefi.com/022-true-cost-car-ownership/. (Stat based on $0.53/mile after considering depreciation, gas, maintenance and taxes on a 5-year-old car.)
 

2. BMJ 2017;357:j1456. (Apr. 19, 2017.) Association between active commuting and incident cardiovascular disease, cancer, and mortality: prospective cohort study. Retrieved from http://www.bmj.com/content/357/bmj.j1456.

 

3. Newsner. (Oct. 27, 2015.) Jeanne Reached 122 Years. Here Are Her Secrets to Living a Long Life. Retrieved from https://en.newsner.com/family/jeanne-reached-122-years-here-are-her-secrets-to-living-a-long-life/.
 

4. “Herr, Ph.D, Norman.” (2007.) Television & Health. Retrieved from https://www.csun.edu/science/health/docs/tv&health.html.
 

5. Rodio, Michael. (Dec. 3, 2015.) Watching TV All Day Is Pretty Much Gonna Kill You (If It Doesn’t Rot Your Brain First). Retrieved from https://www.mensfitness.com/life/entertainment/watching-tv-all-day-pretty-much-gonna-kill-you.

 

6. Parker-Pope, Tara. (Dec. 16, 2009.) How Less TV Changes Your Day. Retrieved from https://well.blogs.nytimes.com/2009/12/16/how-less-tv-changes-your-day/.

 

7. Malacoff, Julia. (Sep. 9, 2016.) Working Out Could Save You $2,500 Every Year. Retrieved from https://www.shape.com/fitness/tips/working-out-could-save-you-2500-every-year.

 

 

Key Takeaways from my Visit to See Vanguard Founder, John Bogle

Last month, I had the good fortune of attending the annual Vanguard Bogleheads® Summit in Malvern, Penn. The special guest was John Bogle, the man known as the “father of index fund investing” and the founder of The Vanguard Group.  Along with this, he is the author of 10 books and has been recognized for his contributions to the investment world by publications ranging from Time Magazine’s “Most Powerful and Influential” to Fortune’s “Giants of the 20th Century.” Despite these accolades, this down-to-earth investment guru insisted on being called “Jack.”
 
Jack created Vanguard in 1974, serving as Chairman and CEO until 1996. He then took on the role of Senior Chairman until 2000. The largest mutual fund organization in the world with over 300 funds, Vanguard manages assets of $3 trillion. Yet unlike most mutual fund companies, it is owned by its shareholders as a not-for-profit organization. Under this model, it returns excess cash flow to its investors in the form of lower mutual fund fees in future years.
 
The Vanguard 500 Index Fund, which was designed to track the S&P 500 Index, was founded by Jack in 1975. It was the first index mutual fund ever, and it continues to reign as Vanguard’s largest fund today.
 
With contributions like these, it’s not hard to guess why Jack is held in such high esteem. In 2017, in fact, Warren Buffett recognized Jack as the person who has done more for individual investors than anyone else.
 
"If a statue is ever erected to honor the person who has done the most for American investors,” said Buffet, “the hands-down choice should be Jack Bogle."1
 
Along with Jack, there were other investing VIPs among the crowd of 200 at the summit: Jonathon Clements, Bill Bernstein, Christine Benz and Gus Sauter. Yet for most of the attendees, it was Jack they came to see. And from the kickoff reception to the final closing remarks, Jack did not disappoint.
 
Below are a few of the golden nuggets of wisdom he shared with conference attendees.
 
On asset allocation
Investors in their post-retirement years typically think they should replace their stock holdings with safer bond options. Not Jack. At the ripe young age of 87, he admitted to a personal allocation of 50% in U.S. stock funds and 50% in bond funds, including some corporate bonds. Yet despite his proven success in building wealth, the genius investor revealed that he often questions his own financial decisions.
 
“I spend half my time worrying that I have too much in stocks and half the time feeling I’ve got too little in stocks.” Apparently, even Jack Bogle is human.
 
On investing internationally
Contrary to most investment thought leaders, Jack believes you can have an excellent investing experience without owning international stocks. During his presentation, he pointed out that half the U.S. company revenues come from overseas. This gives investors global diversification while investing in a U.S. stock fund. He did mention, however, that currency may have some effect on why certain countries do better than others in the short term.
 
Jack also emphasized that the majority of the international market cap centered in three key markets: the UK, which could be sluggish from Brexit; Japan, which is still struggling with an aging population; and France, where he feels there may be too many labor-friendly policies like the 36-hour work week … upon which he quipped that he still works 36 hours in the first few days of the week.
 
To further defend his point, he pointed out that US stock market returns have smoked international since 1997, where the US S&P 500 has averaged annually 7.7% while international developed stocks trailed with 4.2% through 2016.
 
With this in mind, he closed by saying (with a hint at self-deprecation), “It seems logical to me that the U.S. stock market will continue to outperform, but I could be wrong.”
 
On the future of U.S. stock market return
In the long term, Jack said that the math was simple on expected return over time. It’s basically dividend yield plus corporate earnings growth. Knowing the former is 2% and the latter should come in around 4%, that makes for a total expected return of 6% in the coming years.   

To those who questioned his estimations, he quipped, “The math is the math. If you don’t like my prediction, make up your own. Though it shouldn’t be a prediction, more like an expected return and make sure to tell us where your estimation comes from.”
 
On index fund variations
When it comes to index fund variations, Jack said that “there’s nothing quite like market cap weighting.” By this, he was referring to a situation where stocks are weighted according to a company’s stock valuation, though he believes factor weighting like value is a little “nutty.” He doesn’t deny there are long periods where value investing beats growth, and then where growth beats value, but he feels that “it should be called what it is: a reversion to the mean.” Among Vanguard’s funds, the “growth vs. value” winner is unclear. In the large cap space over the past 10 years, growth prevails while among their small cap index funds value has the upper hand, though performance history is limited due to lifespan of the various Vanguard category funds. In addition, dismissing that value stocks offer higher return runs contrary to the Nobel prize winning economist Eugene Fama (U. of Chicago) who along with Kenneth French (Dartmouth) indicated through their research that small cap stocks and value stocks would support higher stock returns over long periods of time.
 
On picking individual stocks
After decades of going against the grain of active fund investing, we now have a lot of data to support that diversified index fund investing really works. In any trade, there is a winner and a loser, and thus, before costs, investing is a zero-sum game. To take this a bit further, half of the stock pickers will win, and half of the stock pickers will lose. The reality is that, after costs, most active fund managers will lose. As an index fund investor, owning most of the market and keeping costs low, you put yourself in the upper half of investor performance in most any given year, and in the top 20% or better over longer periods of time.
 
“Don’t bet your financial future on bad odds,” Jack summed. “Lifetime investing is what we all should be thinking about. What will work in the long run?” 
 
On his legacy
When asked about how it feels to reflect on the impact he has had on the financial industry and so many individual investors, he simply shared a quote by Sophocles: “One must wait until the evening to see how splendid the day has been … my evening has not yet come.”
 
On character and humility
“My wife, Eve, of 60 years thinks that I am bereft of humility. Look, I just want to be the same kind of kid that I grew up as.”
 
On going against the grain
“I have never given a damn about what most anyone else thinks.”
 
What lies ahead
At one point, Jack was asked what the next Jack Bogle would change. This question set him back for a moment. Then he remarked that there are still too many opportunities for Wall Street to unnecessarily extract too much value from Main Street.
 
In fact, he considers some of the practices as borderline fraud. They get away with this, he said, because the markets keep going up. For his part, though, he has enjoyed “doing something right in an industry that often refuses to do the right thing.”
 
On Jack’s heroes
When asked who has inspired him, Jack listed Warren Buffett, Andrew Hamilton and Ben Franklin.
 
On success
Here, Jack kept it short and sweet. The keys to success are simple, he said. You just need to “work a little harder, work a little smarter, and be a self-starter.”
 
The big takeaway
It was a privilege and honor to meet Jack, and I learned much while listening to him present over the two days of the conference. As I sat among the many Bogleheads who make an annual pilgrimage to hear him speak, I now understand why.  As his disciples, they are among those who consider the index fund to be one of the best inventions of our time, and its inventor to be one of the smartest financial gurus of the last half century.
 
For many, the work of Jack Bogle and Vanguard has led his followers to afford first homes, put kids through college, manage career changes, experience grand life pursuits and ultimately master retirement.
 
In a world with so many challenges, it’s comforting to know that there’s a man like Jack, whose life’s mission has been “to help individual investors build wealth without paying excessive fees, guide them into investments which will yield the market return without additional risks, and promote suitable asset allocations that match individual risk tolerance.”2
 
As investors, we can all use a hero like that.
 
Sources:
1 -
http://www.businessinsider.com/warren-buffett-praises-vanguards-jack-bogle-in-annual-letter-2017-2, Feb 25, 2017, Levy
2 - https://sites.google.com/site/bogleheadsmeeting/
3 -
http://money.cnn.com/2017/03/08/investing/vanguard-jack-bogle-stock-market-not-in-bubble/index.html, March 8, 2017, Long, Heather
 

 
All investing involves risks.
Past investing performance is no guarantee of future results.

 

Should You Worry About A Stock Market Correction?

The financial community defines a stock market decline of more than 10 percent in value as a “correction.” Such an event, both before and when it actually happens, can cause you to feel alarmed to downright terrified.
 
Despite this, I suggest that investors, particularly the buy-and-hold type, put their fears aside and not be overly concerned about a so-called market correction.
 
Corrections won’t crack a balanced nest egg
 
For starters, the “market” we are talking about is the one for stocks, not bonds. Assuming that your portfolio features a moderate asset-allocation as described below—somewhere in the range of a 60% - 40% stock-bond split—market corrections will only affect a portion of your overall nest egg.
 
Corrections are a certainty...just like death and taxes
 
Secondly, market corrections are an inherent part of the investing process and occur on a fairly regular basis. Simply stated, a stock market correction is an inevitable part of stock ownership. However, as an exception to the rule, the U.S. stock market has been pretty tame on the downside since 2011. As a result, investors have had little experience lately with a down market.  

 
MARKET FLUCTUATIONS: A HISTORY OF DECLINES 1900 – 2015
 

% DECLINE                  AVERAGE FREQUENCY        AVERAGE LENGTH    LAST OCCURRENCE
 

              -5%               About 3 times a year                 47 days                                      August 2015
            -10%               About once a year                      115 days                                   August 2015
            -15%               About once every 2 years         216 days                                   October 2011
            -20%               About once every 3.5 years     338 days                                  March 2009

 
As I write this article, some stock valuations are hitting historical highs on a regular basis. So it comes as no surprise that the financial media is full of predictions about when, not if, a market correction will occur.
 
And, based on historical trends, one could reasonably assume that we are overdue. On the other hand, one could also argue that we have been here before. Recall the year of 1996 when we had 15 years of steady growth behind our backs, resembling our recent S&P 500 run. Who would have ever guessed we would see another 4 years of strong stock market return?  Bottom line, we simply cannot predict a correction. When it happens, you’ll know it. No need to spend time and energy worrying. Instead, invest with the long term in mind.
 
If you have high-quality investments, don’t be tempted to tinker with your portfolio. Experience shows that a correction’s “bark” is worse than its “bite.” Long-term investors can actually view a correction as an opportunity to add new money to proven investment positions at favorable prices.
 
Corrections can be erratic . . . like temperamental toddlers
 
Thirdly, just as market corrections cannot be predicted, no one has ever been able to predict how long they will last or how deep (percentage decline) they will go. The takeaway here is that you should not try to time the market. Getting out when the market falters and getting back in when it rebounds is a losing proposition.
 
Corrections offer a second chance to rethink your holdings
 
Fourthly, tracking how your stocks and stock mutual funds perform (loss and recovery of value) during and after a market correction provides investors with an opportunity to assess the defensive and offensive strengths of individual holdings. It’s also a good time to revisit why you bought and continue to hold the various holdings you have in your portfolio.
 
It’s not easy to decide what to do, or what not to do, when faced with a market correction that affects you directly. My advice is to first make sure the situation is being analyzed by using the reflective, left side of your brain. Restraining the brain’s reflexive, right side will take the emotions out of the decision-making process.
 
Limit worries with a balanced portfolio
 
If you have a reasonable asset-allocation for your time horizon, you’ll have less to worry about than investors with stock-heavy portfolios who need to begin withdrawal within a few years. To illustrate this point, let’s look at the historical performance record of a moderate allocation mutual fund in relation to some notable stock market declines.
 
The fund in question, Vanguard Balanced Index (VBINX), maintains a steady 60% - 40% stock-bond portfolio mix by following total stock and bond market indices. The Fund is highly rated by Morningstar and has a solid long-term track record: A 10-year annual average total return of 6.23% with a below-average risk and an above-average return category-comparison rating.
 
VBINX accomplished this respectable performance while enduring three market corrections in 2008, 2011 and 2015. If you invested in this Fund during those years, you would have had to live with annual total returns of – 22.21%, + 4.14%, and + 0.37%, respectively. Just remembering the negative 39% stock market drop in the 2008-2009 period should be sufficient evidence to substantiate the value of asset-allocation when it comes to protecting financial asset values.
 
In summary, I believe it’s a waste of time to worry about market corrections. Not because they won’t come – they will. However, following Vanguard founder John Bogle’s advice to “stay the course,” a reasonably balanced portfolio of high-quality stock and bond investments will lessen the damage, strengthen a recovery of value, and justify a long-term, buy-and-hold investing strategy.

 

Source of Market Fluctuation data:

American Funds website. “Market Declines, A History”, Source: The unmanaged Dow Jones Industrial Average, https ://americanfundsretirement.retire.americanfunds.com/basics/volatile-market/market-declines
All investing involves risks. Past performance is no guarantee of future results.

A Mortgage Forever? Think Again

Nervous about the stock market? Frustrated by low bond yields? Consider taking some of your investment dollars and using them to pay down your mortgage.

Now I know what you’re thinking: “My mortgage interest rate is only 4%. I can make a better return by investing.” 

And you’re correct…kind of.

It’s true that you can earn more by investing your money wisely over the long term. In fact, there are certainly things you should do before chipping away at the mortgage—like paying off credit cards, investing in your 401(k), and setting up an emergency fund. 

It’s also true that making extra mortgage payments won’t earn you dazzling returns. If your mortgage rate is 4%, your effective rate of return is going to be . . . 4%. 

But there are still some very compelling reasons to minimize your mortgage.

1 - Put your cash to work

Are you putting your hard-earned cash to work? Many people aren’t. In fact, it’s not uncommon to find upper middle-class Americans holding anywhere between $50,000 - $100,000 in cash. This occurs despite emergency fund requirements that are much lower. (The CFP Board encourages 3-6 months of spending needs in an emergency fund). 

Others let their money sit idle in CDs or money market funds. Yet cash sitting in these investments loses value to inflation every day. Instead, use that money to make 1 or 2 extra house payments per year and attain a guaranteed return.

2 - Earn a higher return rate

Not all investors invest wisely. According to Dalbar’s annual study1, the average investor from 1996-2015 achieved only a 2.1% return. During this same timeframe, S&P 500 investors saw gains of 8.2%. The reason for this large gap was investors’ inability to stay the course with a low cost well-defined strategy, combined with futile attempts to perform market timing. 

With this in mind, a guaranteed return of 4% by paying off the mortgage sure beats the 2% average by many investors. And, for conservative investors who would otherwise buy bonds or money market funds, the 4% guaranteed rate of return might sound rather appealing.

3 - Enter your golden years debt-free

Not that long ago, retiring with a mortgage was unthinkable. When that last payment was made, homeowners celebrated. Neighbors even held mortgage-burning parties.

For investors with 30 years of retirement ahead of them, the number one fear is running out of money2. If you work to pay off your mortgage early, you can retire knowing your biggest expense is soon to be eliminated or is already gone.

4 - Increase your tax savings

If you’re concerned about losing your mortgage interest tax deduction by paying off your home loan early, I’ve got good news. As it turns out, the interest tax deduction is highly over-rated when it comes to retirement. By not having a mortgage payment at all, you could save even more on taxes in your golden years.

How does this work? Consider this example.

Mary and Bob are in their late 40s and have a 30-year, $500,000 mortgage. It saves them $4,000 a year in taxes. If they pay off their mortgage gradually between now and retirement, they could still save $3,000 in annual taxes now. Once in retirement, assuming they are using IRAs to cover a large part of their expenses, they would save closer to $7,500 a year due to reduced IRA withdrawals. 

In the “keep paying for 30 years” scenario, the tax savings from mortgage interest over the life of the loan equates to about $60,000. In the “pay off the loan early” scenario, the tax savings would be closer to $110,000—nearly twice the savings of keeping the loan.   

5 - Retire early

Studies show that Americans are 20% more likely to retire before age 65 if their mortgage is paid off.3 No doubt this is due to the confidence in knowing your home—which amounts to 20%-30% of your pre-retirement spending—is paid off.

If you’re feeling conflicted about what to do, start by making one extra mortgage payment this year. With some lenders, you can do this by paying a little extra on each mortgage payment, or by paying more payments each month.

As an example, let’s say you borrowed $500,000 using a 30-year loan at 4% interest. If you added $300 to each mortgage payment, you could save yourself $77,518 in interest and pay off the loan 6 years early.

If that one extra payment a year feels pretty good, next year take part of your pay raise or annual bonus to make two extra payments. 

Paying off a mortgage early is not for everyone. First, you’ll want to ensure you have eliminated all higher interest debt, are maxing out tax shelters like 401(k)s (LINK TO TAX SHELTER ARTICLE), and have college savings completely on track. 

If all other savings opportunities are going well and are invested wisely, then take a look at reducing your mortgage. For those who are conservative and contemplating a CD at 2% interest, lopping off a chunk of your mortgage might be a much smarter move. In the hunt for guaranteed return, your answer might be literally at your front door.

1.  Dalbar.  Quantitative Analysis of Investor Behavior Study, 2015. utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/15 to match Dalbar’s most recent analysis. 

2. AICPA, American Institute of CPAs, “Running Out of Money is Top Retirement Concern, Says AICPA Survey of Financial Planners”, Oct. 6, 2016

3.  Urban Institute.  “Older Americans in Debt Are More Likely to Work.” May 2016 Powerpoint. 

All investing involves risks.

Historical investing performance does not guarantee future returns.

Santa's List for Wealth

Are you Being Naughty or Nice with Your Critical Money Decisions?

Why does Santa check his list not once, but twice? It’s to make sure he’s made the right decisions.  If you can get the big decisions right in your financial life, wealth will follow.

Here’s a list of the 10 most important money decisions you will ever make.   

#1 - How much ownership should I take with my finances?

In this busy world, it may be tempting to put off your financial planning until later or assign the task to someone else. But is this wise?

Consider your physical health for a moment. Would you let someone else choose what’s best for you if you got ill? Would you let someone else make key decisions for you like electing surgery or taking medication without your say? Probably not. Then why would you give up control of your financial health?

How engaged you are in growing your wealth truly matters, so take charge now. Start by reviewing or creating your financial plan. By taking responsibility for your own financial well-being, you increase your odds for success.   

#2 - How much should I save?

This is the biggest driver of your investment growth. After all, if you don’t save, you can’t invest. Aim to sock away at least 10% of your salary every year—more, if possible.

Not good at saving? Then you probably shouldn’t buy that new gas-guzzling SUV, pay for top-of-the-line cell phone or cable plans, or eat out daily. Make it your goal to spend less and save more in 2017, so you can set yourself up for financial security.

#3 - How much should I put into stocks?

The more you invest in a diversified mix of stocks over your lifetime, the higher your return will likely be in the long run.

So what’s considered long term? According to the September edition of JP Morgan’s “Guide to the Markets,” the 10-year rolling return since 1950 of the S&P 500 ranges from -1% to 19%, so 10 years might serve as a good guide. In addition, you should expect negative returns in the stock market at least 1 out of every 5 years; so, each time you hit a pothole in your investments, don’t jump ship. 

While there is a greater chance of short-term losses with stocks, the game of stock investing will be won by the patient and disciplined.  

#4 – Should I be an investor or a speculator

It’s not an easy choice. Research has shown that “market timing” most often does not work. But the daily headlines telling you to “buy this stock” and “sell that one” can challenge your investment discipline.

It’s also easy to fall prey to “hot stocks,” even when you know reliable investing results depend on diversification. The trick is to keep the speculative portion of your investments as small as possible. That way, if they do go cold, your temporary losses will be minimal.

#5 - Where should I live? 

Think carefully before picking the mansion over the modest home. If you buy the biggest house you can afford, you’ll have less money available to pay for college or retire early. And here’s something else to ponder: wealth is often found in neighborhoods with old cars and tall trees.

Just look at Warren Buffet. He lives in a 5-bedroom, 2.5-bath house in an old neighborhood in Omaha, Nebraska. Not in a beachside mansion or country manor surrounded by acres of land. The lesson here? Just because you’ve got money doesn’t mean you have to flaunt it. When you’re sitting on a sizable nest egg in retirement, you’ll be glad you didn’t.   

#6 - How can I manage my taxes more effectively?

You are surrounded by investment account options that offer many tax advantages—like IRAs, Roth IRAs, 401(k)s, 529s and health savings accounts (HSAs). Yet very few people maximize these tax shelters. This is a mistake.

When you use them, tax shelters can help you keep more money in your pocket so you can create a more stable financial future. For more on this, read my recent article on tax shelters.

Also, tax strategy should be reviewed carefully with a CPA or enrolled agent in order to ensure smart tax moves.

#7 - How many kids should I have? 

The Department of Agriculture now predicts it will cost $250,000 to raise a child. In California, this figure is closer to $350,000. Eighteen years of childcare, medical bills, groceries, clothes and shoes, summer camps, and piano lessons can really add up.

And don’t forget about college. Four years at a top university can run well over $150,000. As you’re thinking about how large a family you want, keep this in mind: Having kids can be exceptionally rewarding, but it’s also enormously expensive.

#8 – Should I pay off my credit cards every month

Carrying credit card debt is an act of financial foolishness. Yet so many of us do it. The average credit card debt in the U.S. is $15,675 at an average interest rate of 15.1%. Ouch! Debt of that size will derail all your other smart financial moves, so put a stop to it before it snowballs out of control. Buy only what you can afford each month, and pay your bills immediately.

#9 – How should I prepare for financial emergencies

A rule of thumb from the CFP Board is to have 3-6 months of your spending set aside in liquid, cash type investments like a Money Market Fund or CD. You should also regularly review your insurance coverage like medical, disability, umbrella, life, home and car to make sure it reflects your current needs. 

#10 - Where should I get financial advice? 

Newspapers and money programs are designed to entertain, so it’s easy to get caught up in the hoopla. Sensible investing, on the other hand, is often rather dull. Rather than following “hot stories,” read books and articles from the best investment gurus on the planet like Charlie Munger, David Swensen, and Warren Buffett.

Aside from the misleading financial media, people often turn to family or friends for investment ideas. Unless your cousin is investment legend Jack Bogle, you may want to look elsewhere.

And then there are local financial advisors, who very well might be a great place to start. Just make sure their motives are in line with yours, and be sure you understand how they are paid.

  • Do they make more money by generating trades?

  • Are they compensated to sell certain products over others? 

  • Are they limited to certain products through their firm that carry high fees, such as mutual fund fees over 1%? 

    If so, you may want to look for an independent, fee-only “fiduciary.” This is a professional who has specific credentials such as CFP (certified financial planner) or CFA (chartered financial analyst). Before investing, be sure you’re clear about the fees you’re paying for both the advisor and his or her recommendations.

    As the year comes to a close, take a few moments to consider the critical financial decisions that you have made. The decisions above should not be taken lightly: these are the most important money decisions you’ll ever make. If you are married or someone else is active in your financial life, sit down together and review where you stand. Santa might bring you plenty of nice things, but only you can give yourself the gift of a strong financial life. 

Painless Ways to Live Below Your Means

Spending less than you earn is quite simply how everyday Americans get rich.

Yet for a lot of people, there is nothing simple about it.  Many find it nearly impossible to live within their means.  So what should you do? Here are 9 ideas:

  1. Start by knowing where your money goes. Track your spending with one of the plethora of tools that are available today: mint.com, Personal Capital, online bank account summaries, or an old-fashioned spreadsheet.  It’s like dieting. If you write down everything you eat, you will eat less.

  2. Crack an axe at reducing re-occurring monthly services like cable, internet, phone, newspapers, and other online memberships by putting on your chief negotiator hat. After doing a little research, dial them up and have the following call, “Mrs. CS agent, I have been a loyal customer for XX years; and I am in a financial bind and need to drop (or replace) your service.  I thought before I did that I should call you and see if you can help me reduce my costs.”  Be willing to drop their service for 3-6 months and then see what discount they will offer to lure you back.  Want to maximize your negotiation, have this call with someone else on the phone with you like your spouse or financial advisor.

  3. Reduce the frequency of services like house-keeping and gardening.  Perhaps investing in lower maintenance plants or indulging in a good vacuum cleaner and hiring your kids to pitch in can lead you to drop these services altogether.

  4. Hunt for the lowest prices, especially with big ticket item purchases; and the biggest store in the world is right at your fingertips.  It’s called Amazon for a reason.  You will be amazed at what you can find on Amazon and Ebay these days, and you will also save gas money and time.

  5. Change your life for the better.  Do you need exercise? Consider riding your bike work. Do you need time? Reduce eating out at lunch.  Are you all about saving the planet? Find a carpool or rideshare near you at https://www.erideshare.com/carpool.

  6. Slash your insurance costs.  A good place to start is the internet.  Try quickquote.com. There has been a feeding frenzy for cheap term life insurance, which is making rates incredibly competitive.  Rebid auto, home, and umbrella policies, and search financial bloggers like “MMM Recommends” for best places to start.  Also look into saving money by boosting deductibles on your auto and home insurance.  Consider whether collision insurance makes sense on your vehicle with the help of a good agent.  

  7. Take full advantage of health savings accounts and retirement savings accounts.  With these employer-sponsored plans, you get to save and spend out of pre-tax dollars.  In many cases, an employer match is also offered, which is the easiest way to get free money. 

  8. Free entertainment abounds. Whether it is the beach or our beautiful libraries, keep a list of favorite “free things to do” and focus your time on those activities.  Free stuff can bring more joy, peace of mind, and less hassle.

  9. The best way to save on expenses is to move to a place where the cost of living is cheaper.  It may be difficult if you are working now, but it certainly should be a consideration as you move into retirement. Sometimes a lower cost of living is less than 15 minutes away.  And, if you really want to hit the jackpot of lower living costs– pay off your mortgage. One extra payment a year can reduce a 30 year mortgage by 5 years or more. 

More often than not, wealth is the result of smart spending, a lifestyle of hard work, discipline and good planning. In the words of Thomas Stanley, author of the Millionaire Next Door: “Many people who live in expensive homes and drive luxury cars do not actually have much wealth…Many people who have a great deal of wealth do not even live in upscale neighborhoods.”
Thomas J. Stanley, The Millionaire Next Door: The Surprising Secrets of America's Wealthy

 

Put More Money In Your Pocket, Not Uncle Sam's

Taxes are everywhere—federal, state, retail, investment, estate—and they can easily eat up over 50% of your income. That’s more than half your money going in Uncle Sam’s pockets.

Wouldn’t you like to keep more of your money in your own pockets?

Luckily, there’s a way to do just that: use tax shelters.

Now I’m not suggesting you fly to the Caymans to open a secret off-shore bank account. The tax shelters I’m talking about are completely legal. In fact, our own politicians created these special account types. The idea is to encourage investors like you and me to save money by offering us certain tax benefits.

To find out which shelters are the most common and what you need to consider when selecting one, read on. I’ll even tell you about the most widely misunderstood option, and why it’s also the best tax shelter of all.

Save Taxes Now - Tax-deferred 401(k)s and Traditional IRAs

The advantage of a 401(k) or traditional IRA is that you can save on taxes now and grow money tax-deferred. The downside is that you’ll pay taxes on this money upon withdrawal. In fact, once you turn 70½, the law requires you to start taking this money out. 

Today many companies offer a 401(k) plan and most match the first 3% - 6% of your contributions. Between the company match and the tax savings, contributing at least up to the match is a no-brainer. For those who don’t have a 401(k) at work, the traditional IRA or a self-employed IRA offers similar tax advantages. Just be sure your CPA gives you the green light before proceeding as income limits do apply.

Lastly, keep in mind that a 401(k) or IRA is a retirement savings tool. That means, with a few exceptions, you won’t be able to take this money out before age 59½. If you do, you’ll pay a 10% penalty.

Save Taxes Later - Roth IRAs

A Roth IRA lets you save after-tax money now, so you can let it grow tax-deferred and never pay taxes on that money again if you play by the rules on withdrawal. 

The real beauty is that it lets you take advantage of a lower tax rate now than you may have in retirement. Often this is the best option if you are younger, starting out in your career, or experiencing low income due to a layoff.   

What most people don’t know about the Roth IRA is that the after-tax money you contribute—what a tax professional calls your “basis”—can be accessed before age 59½ without paying a penalty. But this only applies if the Roth has been open for at least 5 years.

More Ways to Save Taxes Later - 529 Plans

529 plans—the education “gold standard”—offer tax savings for money that will be used in the future for qualified college education expenses. This includes tuition, room and board, and books. Like the Roth, you put after-tax money aside today that grows tax-deferred over many years. 

You can even move this money between family members or use it for yourself. Plus, the accounts never expire.

Save Taxes Now and Later - Health Savings Accounts

The health savings account (HSA) is a tax shelter that is both widely misunderstood and your most appealing option. That’s because it lets you save on taxes now AND later!

This type of account lets you save money for medical expenses over your lifetime. Here’s how it works:

·         You become eligible when you enroll in a high-deductible health medical plan (with a minimum annual deductible of $1,300 for individuals and $2,600 for a family).

  • There are annual contribution limits: $3,350 for individual plans and $6,650 for a family plan. 

  • Individuals over 55 can contribute another $1,000/year for catch-up. 

  • If you’re under 65 and withdraw money for a non-medical use, taxes and penalties will apply. If you’re under 65 and use HSA funds for medical expenses such as co-payments, deductibles, and other non-covered expenses, then taxes and penalties don’t apply. This makes these plans more age flexible than the retirement plans mentioned previously. 

  • HSA money can be used to pay for Medicare premiums in retirement or for insurance premiums while on COBRA.

    The money rolls over from one year to the next. 

Since many retirees will spend 30% or more of their income on medical expenses, having a sizeable HSA account as you enter retirement can be a very smart financial move. And it will save on taxes now, too, as a deduction from your current income.  

How to Get Started

Tax savings abound if you’re willing and able to shelter your money. But you need to act fast. Many of these options with annual limits in essence “expire” at the end of the year, meaning you can participate next year, but the annual amount of $18,000 in a 401K for this year of your life expires. As with many aspects of money management, procrastination is not your friend.   

Here’s what you need to do:

  • Consult an HR professional for help with logistics.

  • Discuss the options with your CPA, preferably before the 2016 tax season hits so there’s time to process the paperwork.   

Using tax shelters can help you keep more money in your pocket and set yourself up for a stable financial future. Happy saving!

 

All suggestions above are based on current tax law and are subject to change. Investing involves risks. This article is not intended as tax advice. Please consult with a CPA for your particular situation.