Inflation Killers—Credit Card Rebates

NOTE: If after reading this, you would like to apply for one of the credit cards that the Fox family uses to max out credit card rebates, we can send you a link and that lines our pockets with a bit of money at no additional cost to you.  Let me know if you’d like to do that.

We’ve talked about how your cell phones are a great killer of inflation, along with other things store brand groceries and Craig’s List and the sharing economy.  But there’s another product that is totally killing inflation that makes those seem like small potatoes—your credit card and the rebates you can now get.

Back in the day credit cards allowed a convenient way to purchase products without having to carry around a lot of cash.  Eventually competition among credit card companies began to heat up, and by the late 1990s they started offering rebates to card holders on their purchases.

Let’s take a quick look at how credit card companies make money:

  1. They charge interest and fees to those who carry a balance. This is where there is a ton of money to be made.  For the purposes of this post, we’ll ignore this other than saying the Fox family never carries a credit card balance.
  2. They take a cut of all purchases. When you buy something for $10 at the store with your credit card, you end up paying $10.00 for it, but the store only gets about $9.41.  That’s because the credit card processing company charges 2.9% of the purchase plus $0.30 on each transaction.  Most people don’t think about this revenue stream, but it definitely adds up.


So obviously to maximize revenue from #2, credit card companies want as many people buying as much stuff as possible on their credit cards.  That leads to competition from the likes of Chase and Capital One and a ton of others, and that competition has taken the form of credit card rebates that over the last 20 years have gotten more and more generous.  Credit card companies are enticing you into using their products by giving you a cut of #2.

My first credit card was a Visa associated with Exxon.  It offered a rebate that could be redeemed for free gas.  It was something like 0.5% of my purchases, but it was better than nothing.  I was already buying gas so once a month I would get something like $12 off a fill-up.  Over the course of a year that added up to maybe $150, not a ton of money but free money nonetheless.  Given that I wasn’t getting that before, that was definitely “deflation” on my gas purchases—SCORE.  Compared to what is offered today, that was just a pittance.


Credit card arms race

Fast forward to 2018 and things have definitely become higher stakes.  We are bombarded with commercials where Discover gives you a rebate and then matches it at the end of the year, Capital One gives you a 1.5% rebate on all your purchases, and Chase gives 2 airline miles for every dollar you spend.

Credit cards are even offering one-time bonuses of hundreds of dollars if you sign up and spend a few thousand dollars in the first few months.

It’s easy to get overwhelmed by all the marketing and confused by all the intricacies of the rebate programs.  But there’s gold in them hills.

If you take a few minutes (and that’s really all it is) to understand the different programs and figure out which one is the best for you, it can be thousands of dollars each year in your pocket.  THOUSANDS OF DOLLARS.


The impact is huge

I’ve mentioned this a few times, but the Fox family plays the credit card roulette game and last year it amounted to about $4,000 in our pockets.  Given we spend about $120,000 a year on expenses, that’s almost 4% of our expenses each year.

You’re probably not surprised that I look at the impact with a spreadsheet, and when you do the numbers it has an enormous impact.  Let’s genericize it and look at my cousin Savvy Fox.  He’s a 22-year-old who graduated from college making $50,000 per year and spending about $40,000 per year of which 80% is stuff on his credit card.  His only major expense that he doesn’t put on his credit card is his rent (and eventually his mortgage); but for everything else he uses his credit card.  Of course, he pays his credit card off each month to avoid usurious interest expenses.

Over the course of his life his income and expenses will grow 3% each year until he’s spending $120,000 per year (like us) when it flattens out.

At age 22 Savvy spends a total of $40,000 of which $32,000 (80% of the total) he uses credit cards for.  Because he’s savvy with his credit cards, he gets about a 4% rebate on those purchases which is $1,280 for the year.  This is found money so Savvy invests it in and index fund and gets about 8% each year.  If he follows this plan for his entire working life (until age 65), when he retires this little exercise will give him a nice little treasure chest of about $660,000.

$660k for doing nothing more than maximizing his credit card rebates!!!  Go ahead and read that again.  In a world where the average net worth of a person is $80k, this little gambit by itself gives you 8x that.  BOOM!!!

To further illustrate the point, $660k is when Savvy is really savvy with credit cards and gets the 4% rebate.  If he wasn’t savvy and just got a 1% rebate, at age 65 he’d have $165k.  That’s really, really good; twice the net worth of the average American, but still HALF A MILLION less than what he could have.

That should show you the stakes.  Now let’s talk about how you get there.


Specifically what the Fox family does

It’s important to find a credit card with the highest rebate.  Right now the ranges from about 1.5% to 2.0%.  But the key is the sign-up bonus.  You can fairly easily get a credit card with a sign-up bonus of $200 and higher, and you get that if you spend something like $1,500 in the first few months.

Our family typically plays this game 2-3 times per year, for both Foxy and me.  So we sign up for a new credit card every few months.  Our normal spending easily gets us to that threshold for the bonus.  So take 3 new credit cards per year times 2 people, and you get a total of 6 new credit cards per year, each of which has a $200 rebate.  Just the rebate gets us at least $1,200.  Add to that 1.5% rebate on all our purchases that we can use a credit card for, let’s say $6,000 per month, and you have another $1,080.  That’s over $2,000 right there of found money.  That gets us to about 3.2%, but we do better.

As generous as personal credit card rebate programs are, business credit card rebate programs are better.  Since Foxy Lady and I hung up our own consulting shingles, we had to set up a business.  Because we have a business we can get business credit cards!!!

At Capital One a typical personal credit card has a rebate of $150 and a 1.5% cash back.  Not bad.  Their business credit card has a rebate of $500 and a 2% cash back.  Much better.  At Chase, they have a business credit card with a $700 rebate (after you account for the annual fee).  Now we’re talking.

You can easily imagine that if Foxy Lady gets two Capital One credit cards per year and two Chase cards, and I do the same, the rebate dollars add up.  I’ll do the math for you—it’s $4,800.  Add to that the cash back which is around 2%, and that’s another $1,440.  We’re getting about $6,200 EVERY YEAR for doing nothing more than using credit cards.  That’s a ton of money that is just sitting out there for the taking.


Bringing this full circle, there is a ton of money out there for people who put maybe two hours per year into getting it by playing the credit card game.  That money hasn’t always been there, so that by definition is DEFLATION.  Credit cards can be a huge inflation killer.

If you are interested in signing up for one of the cards we use, if we send you a link we get a bit of a bonus from Chase or Capital One.  If you want to do that, just shoot me an email.

Keeping up with the Jones . . . financially that is


Quick story

Los Angeles is a pretty bizzaro place in general, and this is especially true when it comes to personal finances.  Houses are so expensive, that it’s hard to understand how people do it.  Also, there’s a culture of conspicuous consumption that pervades everything; everyone looks like they’re spending a ton of money (and often they are).  A friend once very wisely said “In LA the BMW 3-series is what Honda Civic is to the rest of the country.”

Foxey and I both had good jobs, were saving a lot, and thought we were “making it”.  Yet, in a lot of ways we looked like the “poor” people on the street.  Our house was fairly average looking, we mowed our own lawn, we both drove old cars (a 1998 Toyota 4-Runner and a 2001 Honda Civic), and in general we had a humble existence.  There seemed a disconnect, and it took an emotional toll.  We were working so hard to save but it didn’t seem like it was making an impact.  Everyone else “looked” richer than we.  What gives?!?!

One day we were at a party, talking to a neighbor who was a mortgage broker.  The neighbor had a few glasses of wine in her and mentioned that she did the mortgages for several people on the street.  She didn’t violate anyone’s confidentiality, but she made a general statement that “you would be shocked at the shit-show that is most of our neighbor’s finances.”  She left it at that.

We’ll come back to this in a second.


Looking at the data

According to the US census, the median net worth for an American is . . . $80,000—and that includes home equity; if you strip out home equity it falls to $25,000.  Since this is an investing blog, and also since you know I don’t think you should rush to pay off your mortgage, let’s just look at net worth excluding home equity.

If your first reaction toggled between “that can’t be right” and “that’s really low” and “Holy Crap!!!” then you’re in good company—that was my reaction. My other reaction was “a really large percentage of their net worth is in their home, and that’s no good.”  But that’s a topic for another post.

The Census Bureau breaks it down every which way.  I think the most interesting is by age:

Age Net worth—with house Net worth—without house
Less than 35 years $6,900 $4,138
35 to 44 years $45,740 $18,197
45 to 54 years $100,404 $38,626
55 to 64 years $164,498 $66,547
.65 to 69 years $193,833 $66,168
.70 to 74 years $225,390 $68,716
.75 and over $197,758 $46,936


There’s an obvious trend that you would expect.  As you get older your net worth grows, peaks in your older years, and then towards the end starts to fall as you spend your nest egg.


People don’t like showing their rear-ends

How do you reconcile all this?  The obvious answer is that, sadly, many people live way beyond their means, showing off a glitzy façade while the financial foundation is completely rotted.  Back in LA, I am certain that we had a net worth higher than nearly all our neighbors.  We certainly had cars crappier than all our neighbors.  We were certainly one of the very few (only?) that mowed our own lawn.

No one wants to “seem” poor, especially when they aren’t.  As I said, it took a bit of a toll.  Fortunately, Foxey and I have good, midwestern roots and were raised to save a big part of our income.  But that’s no fun.  I’m a bit of a freak so I actually derive a lot of pleasure from buying index mutual funds and watching numbers on a spreadsheet get larger.  Foxey is much more normal, and enjoys buying actual things rather than just socking the money away.

Our neighbors, on the other hand, were not saving as much as we were.  If you believe the mortgage brokers comments, many were spending much more than they were making, and weren’t saving at all.  Looking at the national data, they had that in common with much of America.

I don’t want to seem as though I don’t think $100,000 is a lot of money.  It definitely is, but it doesn’t seem like a lot over a lifetime of savings.  Yet, that $100,000 is significantly more than most Americans have saved.  I’m guessing it is probably more than many had on our street, despite all outward appearances seeming to indicate otherwise.  It just seems weird and sad.


The point of all of this is that it’s good to know how much you have saved.  Hopefully, one of the things you get from this blog is how to take stock of where you are and what your plan is to achieve your financial goal.

It’s also good to put your savings into perspective.  Saving money is HARD work, especially emotionally given that we live in a world of conspicuous consumption where we are inundated, in the words of Tyler Durden: “Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.”

It may not always be apparent, but I think it’s always worthwhile.  Amazingly, and very sadly too, just doing a little bit of savings over a long time will put you well ahead of the average American.  Take a look at those median values again—it’s sobering.

Maybe all of us savers need a special handshake or something so we can know that we aren’t alone.  I hope this post makes you as a saver feel that you aren’t alone and that it is worth while.

Dear 2017, You were pretty awesome

As the door closes on 2017, let’s take a few minutes to reminisce about what an incredible year 2017 was for investors.  For the Fox family it’s awesomeness was especially welcome given that our careers have shifted quite a bit, moving away from working for the man to working for ourselves (though, one of us happens to be a man).

Let’s look at the numbers, and figure out what it all means.


A tale of the tape

Like most investors, we had a really good 2017.  Here is how our portfolio broke down:


Portfolio weight

2017 return

US stocks (VTSAX)



International stocks (VTIAX)



Real Estate Investment Trusts (VGSLX)



Commodities (DJP)



Lending Club








No matter how you look at it, 2017 was a GREAT year for stocks.  The US stock market did really well, growing 19%.  This can become really political really quickly when assigning credit/blame for such things to politicians.  However, I think it’s fair to say the Trump administration has been fairly pro-business.  That, along with the massive tax cut, definitely gave a boost to stocks.

Also, we saw economic growth really pick up while unemployment went to historic lows.  And all that was happening while inflation remained very low (more on this in a second).  If you put all that together, that’s a perfect recipe for awesome stock performances, and that’s exactly what we had.

Not to be outdone, international markets really kicked it into high gear.  Coming into 2017, US stocks had outperformed international stocks (pretty dramatically, actually) for four years in a row, every year since 2012.  That ended this year.  International stocks were up an astounding 24% compared to the paltry 19% that US stocks were able to muster.

I think that’s a good reminder that you can never really outsmart the market.  At the beginning of 2017 there was every reason to believe that US stocks would do better.  There was a ton of momentum in the US coming off of Trump’s election.  Plus, Europe seemed embroiled in political quagmires—Brexit, French elections with extreme candidates polling well, Greece being Greece.  Asia similarly seemed poised for another yawn of a year—Japan remain in a deflationary stagnation, Noth Korea being a total wild card, and it looked like China’s economy would slow down.

Our interpretations were dead wrong and those markets kicked butt, and international markets outpaced the US markets by 5%.  5%!!!  That’s a lot actually.


Inflation remains dormant

While all this was happening, inflation remained remarkably tame.  You know I spend a ton of time and energy talking about inflation because it has such a big impact on the purchasing power of your savings.

Huge returns like we had in 2017 are great, but what’s the point if those gains are all eaten away by higher prices?  The final reading for December will come out in mid-January, but preliminary readings indicate that inflation for the year will come in at about 2.1%.  2.1%!!!  As high as those 20-ish% returns were, that’s how low 2% inflation is.

As an investor, it really doesn’t get much better than that—high returns and low inflation.


Regrets, I’ve had a few

As you know, I always use New Years as a natural time to take stock (no pun intended) of things.  Now is a really good time to look at how we did, thinking about the things we did well with our investments and what we could have done better.

The high points of our investments were the US and International stocks.  We invested in all index mutual funds so we really didn’t do anything here.  Just “set it, and forget it”.  I suppose that speaks to how useless I am as an investor—the best part of our portfolio is the one that I did the least for.

Certainly, we did have some not-so-great investments.  I hate to be picky in a year where our portfolio grew 19%, but 2017 really exposed some stupid decisions that I had made.  Look at our returns, and the two “basic” investments that everyone should have (I even wrote a whole post on this very subject).  Those did the best.

The investments that did the worst were those “other” investments that aren’t one of the three basic ingredients.  I’m stupid, and that stupidity probably cost us $50,000 this year.  Ouch.

I’ve chatted about our commodities investment and our Lending Club investment, both of which have been incredible duds.  Currently, we’re in the process of eliminating those from our portfolio, so hopefully in 2018 we won’t have to deal with that crap.  Of course, because the investing gods like to humble stupid people, I am sure those two will perform spectacularly this year.

As for the REIT, over the longer-term it’s done fairly well (not as good as US stocks but better than International stocks).  This was just a down year, so that happens sometimes.  Still, it begs the question why we got into this instead of just sticking to the three ingredients, and I have some lame excuses, but nothing worth mentioning.  Hmmmm.


So there you have it.  2017 was an incredible year for being an investor.  Despite the couple misses we had, our two biggest investments really did well, so we’re happy.

How about you?  How did your portfolio do in 2017?

RIP Inflation

Inflation is dead!!!  That’s quite a proclamation.  Is the stress of the holidays getting to me, making my mind soft?  Or is there something really to it?

If you are a regular reader of this column, you know that inflation can have an enormous impact on your financial plan.  You also know that I think that the government’s official measure of inflation (CPI) is way overstated.  No matter what you think, it’s undeniable that inflation is important and generally the lower the better.

If you don’t want to read the whole column, I’ll give you the answer: robots and engineering.  If you’re interested in my reasoning, read on.


Quick Crash Course

Inflation basically comes from one of two places:

  1. The government going insane and turning the presses on to print more money. This is hyperinflation and Zimbabwe and Venezuela lately and the Weimar Republic in the 1920s are good examples of this.
  2. The general rise in prices as people demand more for their labor and raw materials get more scarce, leading to increased prices.

Say what you will about the insanity of Washington, but #1 really isn’t a concern.  So inflation for the rich countries of the world really comes from #2.



The latest bout of really bad inflation in the US was in the 1970s and carried over to the early 1980s until Ronald Reagan and Paul Volker punched inflation in the face.  That was started by the oil shocks that OPEC imposed on the world.

Oil production was curtailed which drove prices higher.  Oil is a bit of a unique commodity in that we used it (and continue to do so although to a lesser degree) in nearly every aspect of life.  More on that in a minute.  Our world was based on oil so we really couldn’t do with less, so we had to pay more.  We really didn’t have a choice.  Prices rose (inflation).

Thirty years later in the mid-2000s oil prices dramatically rose again to $150 per barrel as demand from India and China shook the markets.  Again we had to use oil so we paid the higher prices, but then that story ended differently.  Technology had advanced so we could use less oil—natural gas powerplants, hybrid cars, solar panels, etc.—which took a bite out of the 2007 oil shock.

Also, and more importantly, technology also allowed fracking and oil sands to produce amazing amounts of oil in the US and Canada.  All the teeth were taken out of the OPEC threat.  Prices cratered over the next few years and have remained at very low levels.  If oil ever goes up again, more fracking and shale sands will be mined to bring prices back down.  We’re probably set with oil prices being moderately controlled for the next 100 years.

BOLD PREDICTION—Oil prices will never rise faster than 2% for the rest of my lifetime.


Other raw materials

Oil is a very unique raw material in that it is used everywhere.  Others aren’t nearly so ubiquitous.  That said, raw materials can increase in price.  However, when that happens our dynamic economy has shown an amazing ability to engineer products to substitute the more expensive raw materials for cheaper ones.

The price of copper has doubled over the last 30 years (from about $1.50 per pound to $3.00 per pound).  That should cause inflation yet think about engineering.  Thirty years ago how much copper was used in telephone line—a ton (literally)?  Now that’s all fiber-optic cable (mostly plastic—which is cheap) that carries a 1000x information at marginally higher prices.  Copper pipes used to be used exclusively in homes.  Now it’s PVC which is cheaper and more durable.  You get my point.

You can also have commodities like foodstuffs (cows and bushels of corn).  In the past those have increased in price significantly.  However, as an economist would predict, as the price goes up farmers plant more corn and ranchers husband more cattle.  That keeps everything at relatively steady prices.

When ever anything gets more expensive, businesses, with their profit motive, will find alternatives to do the job better at a lower price.  That is going to keep a major cap on inflation.

BOLD PREDICTION—There won’t be raw material whose price goes up significantly while also whose use increases significantly.



The largest component of inflation is human labor.  In the past, there has always been a general pull towards higher wages.  When the economy is weak (unemployment is high) that tends to slow or even stop.  When the economy is strong (unemployment is low) companies have to compete for workers and they do so by raising wages.  That leads to higher prices.

Of course, higher prices don’t always translate to inflation.  If a person is paid more but is much more productive (thanks to computers or other tools) that doesn’t lead to inflation, and if the productivity improvements are large enough will often lead to deflation.

However, and here’s the political hot potato, those productivity advances tend to be focused on the highest-skill workers.  Engineers now have computers to make them more productive; airline pilots have more advanced aircraft; construction workers have better tractors.  When most of those people got pay increases it was because they were more productive, no their impact on inflation was minimal.

The low-skill workers really haven’t gotten productivity enhancements, so any pay increases they got typically led to inflation.  But look at what has happened to all those low-skill jobs.  They have disappeared or are disappearing.  You don’t have gas-station attendants and grocery-store baggers anymore.  Cashiers are quickly disappearing.  Soon waitresses are going to disappear.

Most of the time the extinction of these jobs is because technology (robots) can replace them at a fraction of the cost.  Politically and socially this is deep water and we could debate this for hours whether this is good or bad.  But from an inflation perspective this is definitely keeping a cap on inflation.  If the wage for a low-skill job rises to fast, a robot or computer replaces it at a cost of pennies on the dollar.

Go to your grocery store and see all the self-checkout lines.  Each of those used to be manned by a low-skill worker.  Now one worker is overseeing 8 lines.  Many restaurants have self-order tablets which eliminate the need for waitresses (now you only need servers).  Of course countless low-skill factory jobs have been eliminated by robots.  You could go on and on.

This puts a huge cap on inflation, leading to much of what we see:

  1. Stagnant wages for low-skill workers
  2. Exponential growth of people-replacing machines
  3. Persistently low inflation.

BOLD PREDICTION—Wages for skilled workers will continue to increase while unskilled workers will decrease. Only a minimum wage will keep wages at the low end up, but that will lead to fewer low-skill jobs available.


The Federal Reserve has said it is baffled by the persistent low inflation in the face of fast economic growth, historically low interest rates, a low unemployment.  In the past those three ingredients always led to inflation, something that the Fed is chartered to control.  To me it seems like an easy situation to figure out, but I am smarter than a Nobel Prize winner 😊.

It’s pretty simple—we aren’t going to have inflation because there are so many amazingly smart (and very well paid) engineers that can find any product (including people) whose prices are rising and replace them with cheaper substitutes.

Like I said before, there are social implications for this which make these issues very gray.  However, keeping to the black and white areas, I believe this means inflation will probably remain low for years to come.  As an investor that’s GREAT NEWS.

Bitcoin—Top 5 WTF

A few of you have written in asking what I think of Bitcoin and its crazy ride.  Here are my Top 5 observations on Bitcoin.


5. Unprecedented wild ride

What has happened with Bitcoin in 2017 is really unprecedented.  Its price has risen about 17x which obviously is a lot.  To me, the more astounding point is that it has risen that high given it has a market cap of $300 billion (that is the total value if you added up all the bitcoins in the world).

If you think of bitcoin as a stock, that combination is pretty incredible.  A lot of stocks have had crazy good years where they increased 17x.  However, most of those are off a really low base: so maybe a $50 million company grew to a $1 billion company.  Obviously, that is much easier to do off a smaller base.

However, with Bitcoin, continuing with that analogy, it grew from a $15 billion company (that’s about in the top 2000 globally) so that isn’t exactly small.  Then it vaulted to $300 billion which would put it at about top 10.  Think about that for a minute.  Crazy.


4. I still don’t get it

I feel like some old man who doesn’t get the world around him.  Damn kids won’t get off my lawn.

I couldn’t tell you with any specificity what Bitcoin is (there are buzzwords like “blockchain” but I don’t know what that means either).  I certainly couldn’t tell you how I could “buy” them or “mine” them.  I don’t know a single vendor who would accept Bitcoins, and if they did I wouldn’t know how you do that transaction.

And I think I tend to be fairly knowledgeable about these things.  I can pay for stuff using my watch which proves I’m at the forefront of technology, but Bitcoin is just beyond me.  I think that applies to most people—the story of Bitcoin is exciting but the details are pretty fuzzy.


3. Not surprising run-up

Given the incredible run-up, I am not surprised of it’s continued push higher in the past couple weeks, thanks to it’s listing on the Chicago Mercantile Exchange earlier in the month.

Being listed (or having your futures listed) on a very legitimate financial exchange obviously lends some credibility to something that up to this point had very little of it in respected financial circles.  Also, it somewhat addresses #4.  You can buy Bitcoin futures on the CME and I think many more people know how to do that than knew how to buy Bitcoins on their own two weeks before.

I still think Bitcoin is built on quicksand and will eventually collapse (more on this in a second), but in the short term it’s not surprising that it’s value has gotten a huge bump as it has been listed.


2. Ticking timebomb

There are a lot of people extremely bearish on Bitcoins, and many can give you a ton of reasons why it’s just an eyelash away from collapse.  I predict that eventually a central bank will crush it like an elephant finally getting annoyed by a gnat.

What would provoke such action by the US Treasury?  A terrorist attack.  It seems likely that given Bitcoins anonymity features, it will be used to fund some type of terrorist attack that will kill innocent Americans.  When that happens you can easily imagine the headlines, and then easily imagine the government’s response.

Bear in mind the whole premise of Bitcoin is that governments aren’t responsible stewards of their fiat currencies, so society needed some type of currency that the government can’t screw up.  That’s a bit of a “Screw-you” to Washington, so I think if there’s any connection between Bitcoin and a terrorist attack, the government will come down HARD.


1. Go left when everyone else says “go right”

There’s a famous saying in investing that saying when everyone believes one thing, the opposite tends to happen.  Right now, EVERYONE is saying that Bitcoin is a bubble and its value will crater.  People have been saying that when it was at $1000 and then the chatter exploded when it crossed the $10,000 threshold.  Now it’s at about $18,000.

Seriously, can you think of one serious, respected analyst who is bullish on Bitcoin?  I can’t.  Can you think of highly-regarded financial people who said Bitcoin is a crazy bubble that will crash HARD.  I can think of about a thousand.

Given that, it makes me think that Bitcoin might still have some upside.


Who knows with all of this?  I know I certainly don’t.  Personally, we don’t invest our money in Bitcoin, mostly because of #4 and a bit because of #2.  That said, I am enjoying the crazy ride that makes for fun reading in The Wall Street Journal.


You missed the boat

We all know that stocks have been on an absolute tear lately (that’s the reason I’m smarter than a Nobel Prize winner).  In fact, if you look at 11 months since Donald Trump was elected, stocks are up about 20%.

On election night the S&P 500 was at 2140 and now it’s at 2550.  It’s blown through major milestones like 2200, 2300, 2400, and a few weeks ago 2500; all in fairly short order.  If you are fully invested you’re loving it and obsessively looking at your spreadsheet to see how your net worth is climbing (okay, maybe that’s just me).

If you aren’t invested, this is a definite missed opportunity.  There are a couple ways you can go with that:

  1. Just don’t invest because you feel you missed the boat already.
  2. Go all in now to not miss any more.
  3. Hold off to wait for the market to fall again, and then invest on the dip.

As you can probably guess, I think #1 is a bad idea and I would recommend #2.  However, what about #3?


Waiting for the downturn

We all know that stocks have been on an unrelenting upward path.  The S&P 500 started at 17 in 1950.  Today it is over 2500.  Of course, it’s never a smooth path.  You’ve had bumper years like this one, really since 2008, all of the 1980s and 1990s, etc.

You’ve also had your downturns.  Some have been long grinds like the 1970s while others have been sharp like the Great Recession.  However, even with those, we’ve definitely done well.  That said, if you missed out on a good run, should you just wait for the next downturn to get back in?

First, I believe that it’s impossible to time that well.  But let’s say your crystal ball is working really well. How often will stocks fall back so you can get back in at the lower levels you missed before?

I looked back at the S&P 500 since it started in 1950, and I looked at all the major milestones for the index.  On January 1, 1950 it started at 16.66, so the first major milestone was 20.  It passed that level in Oct 1950 and it never looked back.  Never again did you as an investor have a chance to get in at 20*.

Same story for milestones 30, 40, and 50.  In the 1950s the stock market did its relentless march, and every time it passed those levels they were never seen again.

It was a different story in the late 1960s and early 1970s.  A MAJOR milestone was hit in June 1968—100 on the S&P 500.  You could imagine this was accompanied by the usual fanfare of surpassing such a level.  The 1970s proved a lousy time for stocks, and the S&P 500 had major moves above and below 100 eleven times.  That’s a lot.  It wasn’t until the Reagan bull market of the 1980s that the stock market broke the trend.

For milestones 150, 200, 400, and 500 there were no pull backs (300 had a pullback thanks to the crazy one-day plunge in 1987).  So again, just like the 1950s, the 1980s and 1990s had a stock market that just blazed through, and if you missed it you missed the boat.  Never again would those levels be seen again.

Milestone First time Revisited
20 Oct-50 0
30 Jul-54 0
40 Jun-55 0
50 Sep-58 0
75 Dec-63 2
100 Jun-68 11
150 Mar-83 0
200 Nov-85 0
300 Mar-87 2
400 Dec-91 0
500 Mar-95 0
750 Nov-96 0
1000 Feb-98 3
1500 Mar-00 6
2000 Aug-14 3
2500 Sep-17 0

Since the 2000s we’ve crossed four major milestones—1000, 1500, 2000, and most recently 2500.  All of those were revisited, mostly due to the Great Recession where the S&P fell from about 1565 all the way down to 670.

Since the Great Recession, the market has been blazing, but it’s been crazy in the process.  The market cleared 2000 in August 2014, but has gone through some brief downturns with fast recoveries like January 2016.  I think more recently we’ve experienced greater volatility in the market, so revisiting might be more common.


Bottom line

That was a gripping history lesson, but what does that mean we should be doing now?  Overall, I think the data shows that stocks always go up.  Sure there will be bumps, but if you invest now, the data shows that, at least based on history, you’ll make money.

On the other hand, despite this crazy good bear market recent years, there have been revisits of these levels.  Are we going to see the S&P 500 at 2000 again?  Maybe.  Based on recent history, I wouldn’t be surprised.  However, I certainly wouldn’t bet on it.  I mean that in the literal sense—I wouldn’t wait to invest my money until I saw a market downturn.  I think it more likely things will keep cranking along and 10 years from now we’ll remember the good ole days when the S&P was at 2500 the same way we think about $0.10 hamburgers from McDonald’s.

You might have missed this boat, but you don’t want to be on the sidelines when the next boat (S&P 500 at 3000) comes around and miss that one too.



* I defined “revisited” is going under the milestone at least 100 days after it passed it.  This is to keep from counting times when it gyrates above and below the milestone over the short term.  For this we wanted to look at times where the market was comfortably above the milestone and then at a later time period fell below it.

Vacation homes—don’t do it

Summer has come and gone, and it’s one more year that I haven’t surfed a 15-foot wave.  I blame the move from LA for a lot of that because I just can’t get out to the ocean as often as I need to (now we’re about 3 hours from the Atlantic).

The obvious solution is for Foxy and I to get a beach house.  This is something we have talked about seriously, off and on, since we moved to North Carolina over two years ago.  The clear benefit is we would have an awesome second home on the Atlantic Ocean: it would be beautiful and peaceful and a blast for the cubs as they grow up, plus the SURFING.

Why wouldn’t we do that?  As with many things the answer is—cut to Stocky rubbing his thumb and middle finger together—money.  It would be a huge expense, but just because something costs a lot doesn’t mean it’s not worth it.  After all, vacations and leisure time are very important.  We’re fortunate that it is a possibility for us.

Ultimately, I think vacation homes tend to be lousy ideas for most people because of two main reasons: 1) They are expensive compared to other options.  2) They really limit what you can do (or want to do) for vacations.


Breaking down the numbers

A vacation house is typically not cheap.  Let’s say a decent beach house right on the water would cost $500,000.  Definitely they can vary widely in price, but we’ll see that the price really doesn’t change our calculations.

Based on some of our recent blogs, we know that you’d typically buy a house with a mortgage, although vacation homes have mortgages less frequently than primary residences.  For simplicity’s sake less assume we bought it outright (again, this won’t really impact our decision).  If we sink $500,000 into a vacation house that means we wouldn’t be able to invest it at a market average of about 7%.  That comes to about $35,000 per year.

Also, owning a vacation home comes with considerable costs.  There’s property taxes—let’s say $4,000 each year.  We’d also have utilities, including luxuries like internet and cable—we’ll put that at $500 per month or $6,000 annually.  Then, because the ocean is such a harsh environment you have a lot of upkeep.  Air conditioners rust, wood needs to be restained, and on and on; I asked a neighbor who used to live on the beach and they said that was probably another $5,000 annually AT LEAST.

The expenses come to $15,000 a year plus the investment potential at $35,000 a year, so now we’re talking $50,000 annually.  My, oh, my.  What we could do with $50,000?  More on this in a second.

Of course, as we talked about a lot in looking at rental properties and your house as an investment, there are some upsides.  Our beach house could appreciate, but national averages put that at about 0.4% annually, so that comes to about $2,000 each year.  Not a big deal.

Plus, I think (I haven’t found a lot of hard data on this) prices for vacation homes are much more volatile than primary residences.

Also, we could rent it out.  That’s what most people do with vacation homes.  There are some major risks with that.  Best case someone else is putting their butt on my toilet seat.  Worst case is someone turns my slice of heaven into a meth lab.


The fun we could have

If we look at all the calculations above, we can simplify it to thinking we have $50,000 annually on vacation.  Think of all the things we could do with $50,000.

If we were super committed to the beach to fulfill my surfing dream, we could rent a place on  After a few minutes of searching I found similarly sized places to the one that cost about $500,000 which are also right on the beach.  We could rent those for $6,000ish for the month of July.  Throw in June and August, and we could rent a beach house for the entire summer for $18,000.  If you annualized that $6,000 per month it comes to $72,000 which is more than the $50,000 we were saying owning a beach house would cost, but there are some problems with that.

Since it’s a beach house aren’t those three summer months really the most important?  Honestly, how often would you be going to the beach in November or March?  Maybe a little bit but probably not that much.

You could imagine a similar scenario with a ski cabin in the mountains.  You’d love it during the winter months when the snow was there, but the other times probably wouldn’t be as awesome.

Oh, and there’s that little thing called . . . the cubs.  We have two little cubs who have school and friends and all that.  So it’s not realistic for us to be away from home during the school year.  Maybe we could pull off a whole summer away at a beach house, but if it was a mountain cabin how often could we spend there?

Add in things like sports, friends’ birthday parties, boy scouts, and on and on.  It just doesn’t seem realistic that we could spend enough time there to justify the $50,000 cost.  That leads to the idea of renting it out when we don’t want to be there, that creates a conundrum too.

We’d want to be at our vacation house during the best times (summer months, holiday weekends) when the rental demand would be the highest.  We could get high rents during those peak times, but then that kind of defeats the purpose of US having the place.  We could rent it out when we didn’t want to go (think March), but that’s when most other people wouldn’t want to go either.  You can see the problem.

There’s a huge connection between the amount of time we’d spend at the beach house and the “goodness” of the decision it would be to buy—the more time we spend the better it would be to purchase.  We just talked about how it’s not really realistic to spend all our time there or even most of our time there.  For a beach house you’d probably max out at all three summer months, and maybe 5 weekends scattered throughout the rest of the year.  That’s the absolute most.

Call that a total of 18 weeks or 4.5 months, and that’s really pushing it.  At $6,000 per month (which is inflated because that is all high season), your rental expenses would come to $27,000 a year.  Doesn’t look good.


Tied to an anchor

In some way, if we bought the beach house it would seem like a sunk cost.  We’d be paying for it whether we spent time there or not.  That would really motivate us to spend every possible moment there, certainly every vacation there.

Yet, that would be a bit of a miss, no?  Beaches are awesome, but what if we wanted to spend a week in the summer visiting Mimi and Grandpa Ocelot in Michigan?  That’s a week we wouldn’t be at the beach house.  Or Disney, or going up to the mountains, or a trip to Washington DC or California.  Just owning that place would put us in a weird spot where we would feel we’d have to go there all the time even if we wanted to go somewhere else.

Now if we rented, we could go to the beach when it suited us but also anywhere else that caught our fancy.  Plus, apparently there is more than one beach in the world.  If we rented we could go to the beach we would have bought at, let’s say Surf City, but also Virginia Beach, Myrtle Beach, Nags Head, Florida, and on and on.  I understand that going to the same place would be nice to get comfortable there, but variety is the spice of life too.


For those main reasons, I think that a vacation home for us doesn’t make sense.  It’s too much, and it ties us to one place.  But I do think there are situations where it does make sense.

If you don’t have little kids, a vacation home makes a lot more sense because you don’t have your calendar dictated by school.  After kids, we could spend the summer months at our beach house but also April and May and then September and October.  Those are beautiful months to stroll on the sand and watch the sun rise over the water.

Plus, as you get older I think you tend to shift from wanting to see a lot of different places to knowing what you like and just wanting that.  My in-laws, Mimi and Grandpa Ocelot are at that stage.  As an example, they have gone to the same timeshare in Florida ever since I’ve known them.  They like the place, like the people, know there won’t be any surprises or anything.

For someone like them you could imagine a vacation home would make sense.  It’s predictable and they could spend enough time there to justify the costs.  Just for Foxy and me, at our age, when we still have an itch to see a lot more of the country and the world, plus with two little cubs, I think you can get a lot more bang for your vacation buck buy NOT buying a vacation home.

Invest in 401k before you payoff student debt

“The longest journey begins with a single step” –Laozi (580 BCE)

Investing is a long-term game.  As that really smart Chinese philosopher said, that long-term game needs to start with your first move.  For most people, investing will start when they get their first “adult” job after college (you already know how I feel about college).

Some people start with a clean financial slate when they leave college, but many have student debt from all the loans they took for that degree.  That sets up an interesting question as they get their first paychecks: what to do with the money?  You can even make the question more precise and ask: should I use my savings to payoff my student loans or start investing?  Let’s dive right in

My niece Starty Fox just graduated with her engineering degree from State U.  She has $20,000 in student loans that has an interest rate of 4.45% (I think that’s the current rate for government backed student loans).  Because she listened to her wise uncle, she got an engineering degree which presents many job opportunities.  She took a good job paying $54,000 per year (luckily her salary is divisible by 12 so this post is a little easier to write).  Plus, they offer a 401k which matches her contributions up to 6% of her salary.

After she accounts for rent (her parents made it clear she could visit, but not live with them), her car payment, food, and other living expenses  she is able to save 10% of her income each month.  She makes $4,500 per month and has $450 left over at the end of each month (let’s ignore taxes for a second, but just a second).

So what should she do, payoff that nagging student debt as fast as she can or start investing in her company’s 401k?


A match lights the world on fire

Let’s say Starty has a neurosis about her debt.  She was raised never to have any debt (although maybe that’s not always the best idea—here and here), so she wants to pay it off as quickly as she can.

If she applied all $450 each month to her student loans, she would pay off that whole $20,000 in a little over 5 years.  There would be a couple things she wouldn’t like.  First, that $450 would be taxed (just like the rest of her income).  Let’s say her marginal tax rate is 20%, so that means the $450 she has set aside is really only $360 after she pays Uncle Sam.  Taxes are unavoidable, so while that’s a bummer for Starty, she accepts it as a fact of life (although maybe she shouldn’t—more on that in a second).

When it is all said and done, she will have paid everything off by the time she turns 27, which isn’t bad.  Through it all she would have paid about $2,300 in interest.  That interest is tax deductible, so it would only feel like about $1,840.  After everything is paid off, she can start investing in her 401k with a clear conscious.

Let’s take the other extreme, and assume that Starty watched Wall Street a lot with her adoring uncle when she was little.  She’s not too concerned about debt, especially when there are other good investment opportunities out there.  She pays her minimum payment on her loan ($150 per month before taxes, $120 after taxes) and then invests the rest in her 401k.

Obviously, the downside of this is it takes her a lot longer to pay off her loan; instead of being done by age 27, she’ll have the debt until she’s 40.  That sucks.  But she more than makes up for that with her 401k.  Every year she contributes $3,600 to her 401k.  When she does this she has three really big spoonfuls of awesomeness working for her:

  1. Tax free—her 401k contributions are pre-tax so just off the top she is saving $30 per month that would go to taxes if she used that money to pay off her loan. That’s enough to buy a new Lululemon outfit and splurge on extra spin classes each year (Foxy Lady just took over my computer for a second).  Sure, eventually she’ll have to pay that in taxes, but there are a lot of things she can do to minimize that when the time comes.
  2. Match—the big one is that Starty gets to take advantage of her company’s match. They match dollar-for-dollar up to 6% of her salary.  Since she’s contributing more than that, she takes complete advantage of the match, and that comes to $270 each month.
  3. Investment returns—obviously this is why we do invest money. On average Starty is going to earn a 6-8% return on her 401k.

If you put that all into the pot and mix it, you’d have a 27-year-old Starty who is debt-free but with nothing in her 401k, or you could have a 27-year-old with $41,000 in her 401k and still with $16,000 in student loans.  Obviously, the 401k option is much better. She has a net worth of $25,000 on her 27th birthday (versus $0 if she paid off her student loans first).


The cause of it all

Those numbers tell a pretty powerful story that from a mathematical point of view, paying off your student loan at the lowest level is best so long as you put that money into your 401k (and not spend it on stupid crap).  However, there are some fairly big assumptions there.

Match—obviously the match is a big part of it all.  Without the match the numbers don’t look nearly as good, but the 401k option still comes out ahead.  On her 27th birthday, she would have a net worth of $5,500, without the match.  Many people may complain that this example isn’t realistic because Starty’s 401k match is so generous, but without the match she still comes out to the good.  And we know a 401k without a match is basically like a traditional IRA which is available to everyone.

Liquidity—when Starty chooses to go all in on her 401k she’s losing a lot of financial flexibility.  At 27 she’ll still have $15,000 of debt that she’ll have to pay off plus she’ll have a lot of her money tied up in her 401k which is very hard to access.  If something happened at ages 22-27 she’d be in pretty much the same boat either way, but after age 27 she’d have a little more flexibility if she had killed the college debt.  This becomes a question very similar to the one we raised with the post on the emergency fund.  Personally, I would be willing to roll the dice for that extra $5-25k over five years, but risk aversion is different for all of us.

That’s all good, but fundamentally this boils down to Starty being able to borrow money at 4.45% (3.6% after taxes) and being able to invest it at a higher rate, 7% for argument’s sake.  Over a 20 year time horizon (about how long it takes her to pay off her student loan), stocks have historically done much better than that 4% hurdle.  For all these reasons, it does make a lot of sense—in Starty’s case thousands of dollars each year—to slowly pay off her college debt and put that money into her 401k.

Emergency fund

As you might imagine, I talk to a lot of people about what they’re doing with their investments.  One of the things I hear a lot is, “I’d like to start investing, but before I do that, I need to build up my emergency fund.”  That sounds pretty prudent.  You don’t want to get caught in the lurch when life throws a curve ball at you.  Yet, I actually think this is a really bad move.  I freely admit that the Fox family does not have an emergency fund.  We have investments, and if the unforeseen happens that’s what we’ll use.


How likely is an emergency?

What are the types of things that you’d use an emergency fund for?  Almost by definition, an emergency is something that is unpredictable and somewhat rare.  If your 12-year-old Honda Civic is starting to die and you know in the next couple years you need to get a new one, that isn’t really an emergency as much as something you need to budget for (that was the exact circumstance of the Fox family a few years back).  If you’re having an “emergency” every year, either you’re the unluckiest of people, or probably  more likely you just have a lifestyle that needs to be budgeted a little differently.

When I think of things that you’d spend an emergency fund on it’s stuff like: your hot water heater gives out, you’re 7-year car gets totaled and insurance only gives you $6000 to get a new one, your son goes into the NICU for four days because of croup and your portion of the bill is $4000 (as happened with Lil’ Fox last year), or you are fired from your job.

As I was writing this post, I asked Foxy Lady if she could remember any emergencies that we have faced since we were married 7 years ago.  The hospital thing with Lil’ Fox was the only one we came up with.  There were smaller things like when we had to replace the dishwasher ($500) or fix the clothes dryer ($400), or fly back to Michigan for a funeral ($400), but the hospital thing was the only major one (I’m defining “major” as more than $1000).  So that means we have averaged one emergency every several years.  Once every several years—I don’t know if we’re more or less prone to emergencies than the general population, but that seems about right.

So be a little more cautious and use once every five years as an average—you have about a 20% chance in any given year of needing to tap into your emergency fund.  We’ll use that in a second.


How likely is it you’ll make money in the stock market?

Obviously we put a huge caveat on this, but we can look at historical performance to get a sense for how likely it is that you’ll make money or lose money if you invest your emergency fund in stocks.  Actually, we kind of did this in a post a while back.

Remember that historically, if you have a one-year investment time horizon, you make money with stocks about 70% of the time.  That is actually pretty good odds that investing your emergency fund in stocks would have you come out ahead, just looking at it for one year.  In fact, we can do the math, and the chances of you having an emergency in a given year and losing money in the market are about 6% (20% chance you’ll have an emergency x 30% chance you’ll lose money in the market that year).

But remember, emergencies don’t happen every year—they tend to be much less frequent than that.  For the Fox family, they happen on average once every five years.  Just for the fun of it I put a table together that estimated the chances of having an emergency if you assume in any given years there’s a 20% chance of having one.  Also, I looked at the historic data to see the probability that you would have lost money in the market over different time horizons.

Time horizon Chance of an emergency Chance of losing money in stock market* Chance of emergency and losing money
1 year 20% 28% 6%
2 years 36% 24% 9%
3 years 49% 18% 9%
5 years 67% 13% 9%
10 years 89% 3% 3%


As we mentioned above, there’s a 6% chance that in any given year you would need to tap your emergency fund when the market was down.  Looking at other time frames you get similar results.  Pretty much any time frame has a less than 10% chance of you needing that emergency money at a time that you would have lost money in the market*.  You need to decide if you’re willing to take that risk, but to me that seems like a no-brainer.  If I have a 90%+ chance of coming out ahead on something, I’m doing it.

You can see where I’m going with this.  First, emergencies don’t happen all that often (if they do, you probably need to come up with another name for them other than “emergency”).  Second, if you give yourself a few years in the stock market, the probability of losing money goes down a lot (of course, it never goes to zero).  That seems like a perfect combination for investing your emergency fund the same way you invest any of your other money.  $10,000 invested in stocks with an average return of 6% would give you about $13,300 after five years; keeping that same amount if your savings account at today’s interest rates would give you about $10,050.  Seriously, that’s ridiculous.

I get that many people look at that and say, “the whole point of an emergency fund is you never know when you’ll need it, so don’t put the money somewhere where you might lose it.”  That’s a very understandable concern, but it’s also where a lot of people are leaving a ton of money on the table.  Over the past 150 years, investing in stocks has a really good track record, and the more time you give it, the better that track record becomes.  You’ll never eliminate all the risk from investing, whether it’s your 401k or US bonds or the cash in your checking account, there will always be some type of risk.

It’s the successful investors who understand that risk and understand how to decrease the risk (expanding that time horizon to five years cuts in half the likelihood of losing money), that are able to get the most bang for their buck.  This is definitely one of those areas where you can get a 1% coupon.


The Fox family eats on our cooking on this one.  We don’t have an emergency fund.  When emergencies do happen like with Lil’ Fox, we pay for it out of our investments, absolutely believing that over our lifetimes there may be one or two instances where we lose money but there will be many, many more where we come out ahead.


Let me know what you think.  Do you have an emergency fund?  Do you think I’m crazy not to have one?

*I used the same methodology for this table that I did for my post “Will you lose money with stocks?”

North Korea not a problem, so says the market

A few days ago, a client called me a bit freaked out.  He wanted to sell out of stocks because of fears that the issue with North Korea could escalate into something terrible, possibly World War III.  Of course I told him to sit tight, because even in the darkest times stocks tend to do well over the long term.

Even so, what makes me so confident that the problems with North Korea won’t lead to a global catastrophe?  Simply put . . . THE MARKET TOLD ME SO.


The stakes are very high

Certainly, the stakes with North Korea are very high.  If things went bad, the outcomes could range from the Korean peninsula being destroyed to a nuclear war enveloping the globe.

If armed conflict broke out, almost assuredly North Korea would attack South Korea and particularly Seoul with a deadly barrage of artillery.  The human cost would be immense.  Also the damage to companies and their property would be vast.  That doesn’t seem important when compared to all the lives that would be lost, but more on that in a minute.

If the conflict spread, Japan would probably be the next victim of North Korea before the US and its allies took control.  Then the two absolute worst case scenarios would be a) North Korea realizing its nuclear-tipped ICBM dream and hitting the US mainland or b) China and Russia being drawn into a war against the US.  Those last two scenarios would lead to unparalleled loss of life and destruction of company property.


Destruction is bad for the stock market

Why do I keep saying “destruction of company property?”  That seems to pale in importance compared to the thousands or millions of lives that could be lost with the doomsday scenarios we’re talking about.

If war broke out a lot of company property, plant, and equipment would be destroyed.  Also a lot of company employees would be killed.  Potentially, if we went to a wartime economy like in World War II, companies would stop making cars and phones and shirts, and start making fighter jets, military gadgets, and uniforms.

All those things would be horrible for the companies’ profitability and therefore their stock price.  Here’s the punchline—if war broke out, that would be terrible for the world’s stock markets overall.  That terribleness would be most acute where the fighting was taking place.


The stock market is pretty smart

There has been a lot of academic study of the wisdom of groups over the individual.  I took a class with Nick Epley at the University of Chicago that looked into this, and that’s one of the lessons that has really stuck with me over the years.  The idea is that if you have a bunch of people with a bunch of different opinions, the “average” opinion is going to turn out to be more right than most of the individual opinions.

Where is the biggest, most organized collection of opinions? In the stock market.  It is fundamentally people with opinions (will things be good and stocks go up, or will things be bad and stocks go down?) betting against each other.  The result of all the bets results in the general movement of the stock market.  If more people bet good things will happen, stocks go up.  If more people bet bad things will happen, stocks go down.

Stock markets have a lot more credibility than talking heads because the former involves people putting their money where their mouth is.  It’s easy to say you are certain that something is going to happen; it’s another bet your money that something is going to happen.  That’s why the stock market tends to get it right, because greedy people who want to make more money are betting.

With regard to the Korean conflict, it’s easy for guests on news channels to say how bad that nuclear test is or how much closer that missile launch puts us to war.  But are those concerns credible?  Does the talking head or the new network really believe that, or is it just a flamboyant statement meant to capture viewer’s interest?


Divining the markets’ message

We’ve talked about geopolitics and stock markets and the destructive potential of a war with North Korea.  Let’s bring it all together.

If war breaks out, a lot of destruction will occur, and that will be horrible for the stock market.  That’s particularly true as you get closer to the epicenter—things will be worse for South Korean stocks since they’ll be the first victims of the war, probably followed by Japan, and then the rest of the world.

If things were REALLY bad, you should see that reflected in the stock markets, yet it isn’t.  If you compare the S&P 500 and a broad Pacific Index (Japan, South Korea, Australia, etc.) and a South Korean stock index, none show signs that a horrible event is going to happen.  In fact, of those three, the South Korean index has VASTLY outperformed the other two.  So much for a real concern that unparalleled destruction is imminent.

That’s not to say there haven’t been reactions.  In the beginning of July (point A) North Korea tested a long-range missile.  South Korean and Pacific markets reacted a little (about 1-2%) and US markets were unfazed.

Later in the month, North Korea tested a second missile that put Guam within range (point B).  Again, there was a reaction from the markets, this time larger and this time the US markets also reacted.

Finally, at the beginning of September, North Korea tested its largest nuclear device yet (point C).  Again, all three markets reacted.

So what does it all mean?  The market did react downward every time one of these tests occurred which means that more people (or more accurately more money) think there is something to be worried about.  However, the shallowness of the dips show that the bad things that “are likely to happen” really aren’t that bad and are more than offset by the good things going on with companies, profits, employment, etc.

Particularly interesting is the South Korean stock market.  If conflict did break out, they would be on the front line and they would suffer the most devastation.  Their reaction to North Korea’s developments are the largest which makes sense.  But like the rest of the world, the South Korean stock market quickly shrugs off the threat and moves on.  As I mentioned earlier, the South Korean stock market has done really well this year, which must mean that they don’t view the threat of war to be that likely.


I hope this gives you comfort; it does to me.  It’s not hard to get wrapped up in all this crap.  Trump and Kim Jong Un certainly don’t make things calmer, and those missile tests keep flying longer and longer distances.  When someone gets on CNN saying we are on the doorstep of Armageddon, it’s easy to believe it, but I think those people are full of crap.

The stock market has a powerful collective wisdom that has a really good track record of being right when individuals are dead wrong.  I think looking at how the stock market has reacted to all of this, and particularly how the South Korean stock market has, should give us all some comfort.