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.

My, oh my, how money has changed

We just got back from a trip to Disney with Lil’ Fox and Mini Fox.  As an aside, Disney World is a pretty amazing place and I highly recommend it to anyone.

While we were on the trip, I was thinking about similar trips my dad took with me and trips his parents took with him.  Because I always think about finance and money, it got me thinking how people paid for those trips—not necessarily how they saved for the trips (which is, of course, an important thing), but how they actually paid money at the point of sale.

Money seems like a real constant in our lives for decades and centuries and millennia.  However, it’s hard to think of something so central to our lives that has changed so drastically over such a short period of time.  In the past 100 years it has changed more than food or clothes or shelter.


Things used to be really risky and inconvenient

Back in the day, let’s say when my dad was a cub in the 1950s, everything was paid in for in cash.  There were innovations like Traveler’s Checks that substituted for cash, and I imagine many people thought of those the way today many people think of Bitcoin—kind of confusing and you aren’t really sure you “get it”.  It was just easier to use cash, something they understood and were used to.

Pretty much all of life revolved around having a ton of cash on hand to conduct your life- -groceries, gas, vacations, washing machines, everything.  That was hugely inconvenient and also incredibly risky.  I remember my grandfather taking about his money belt and false wallet, both tools meant to counteract enterprising pickpockets.

A couple decades later, let’s say the 1970s, charge cards hit the scene, first for department stores and gas stations.  Those could only be used at a specific store (your Sears card could only be used at Sears), so that wasn’t super convenient, but it was a major improvement.

In the 1980s, credit cards as we know them today became widespread.  Credit cards cousin, debit cards, which act in pretty much the same way but deduct straight from your checking account, were being used broadly by the 1990s.  Even though that’s where we are today, even credit cards have evolved in a major way.


The modern art of buying

Today the vast majority of retail transactions are done with credit cards, but the credit card you’re using is very different from the one my dad used in 1983.  Probably the biggest difference is that nearly every credit card offers a pretty substantial bonus of some sort.  It can be airline miles or hotel points or cash.  This can be a pretty big deal.

The Fox family plays credit card roulette (we get a new credit card every few months to take advantage of their initial purchase bonuses) and that nets us about $2,500 each year.  That just paid for our vacation.

All that said, we are very far from the cutting edge when it comes to this stuff.  In the mid-2000s this crazy thing called “Paypal” hit the scene.  When I was in grad school the cooler kids were using Paypal and paying each other for stuff.  I didn’t fully get it, and I admit that I don’t use it today.  Nonetheless peer-to-peer pay networks were here.

Fast-forward a few years and you got digital currencies like Bitcoin.  As much as I don’t fully understand Paypal, I understand Bitcoin even less.  What I do know is that Paypal was based on US dollars but offered a different and more convenient way to pay.  Now it seems Bitcoin is based on its own currency and then also offers a different and more convenient way to pay.

Add on to that, if you like a bit more risk in your investing portfolio, Bitcoins themselves, beyond just the ability to pay for stuff, can go up or down in value so it that way it looks like an investment (or gamble).  One Bitcoin was worth $1000 at the start of the year and now is worth about $7000.  Crazy.


What it all means?

For finance and history nerds like me, I think this is a really fascinating study.  I have always said that inflation is way overstated and I think we can find one of the reasons here.  Think about how much easier and faster things are for businesses now with credit cards and other electronic financing compared to the cash economy of my grandfather’s time.  That impacts nearly everything so the stakes are high.  That savings gets passed on to the consumer, and we get lower inflation.  Score.

Second, today, there’s a huge upside to using money innovations like credit card rewards.  It can pay for our Disney vacation every real.  That just became real.

If credit card rewards can do that for me today, and I admit I’m a late adopter when it comes to this stuff, what is the upside still out there.  Are there similar dollars provided by the Paypals and Bitcoins of the world that I just don’t understand enough yet to pick up off the ground?  Probably.

Are there going to be further money innovations in the future that will provide even more dollars?  Certainly.  I don’t know what they are in a similar way my dad in 1983 could never have imagined Paypal or Bitcoin, but they’ll certainly be there.  If today I’m basically getting a vacation for free, who knows what money innovations will bring me over the next few years.

Maybe that should motivate me to figure out this crazy, newfangled Paypal and Bitcoin things.


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.

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?”

How to invest a windfall

This is a first-world problem for sure, but many of us at one point or another will get large amount of money all at once.  We know from asset allocation that we should invest it in stocks, but the questions becomes one of timing.  Maybe it’s an insurance payout, a tax refund in April, a bonus check, or a bunch of cash you’ve accumulated in your checking account.  In fact, when I was still working at Medtronic every July the Fox family would face this exact scenario when I get my bonus check.  Let me tell you my thoughts on the matter (which of course is not an expert opinion, and which looks at historical price movements but makes no prediction on future stock movements).

When I would get my bonus, and what I would have suggested, is to take the big chunk of money and invest it in equal pieces over a couple months.  Vanguard and most places will let you set up an automatic investment, so in the words of Ron Popeil “you can set it and forget it.”  So let’s imagine someone would invest equal amounts each week for the next 10 weeks.   Why do I do it this way?  Because I’m a spaz.

If I invested all the money at once, I would be totally freaked out that I would buy at the wrong time—either I would buy the day after stocks went up 1% or I would buy the day before stocks dropped 1%.  Using simple scenario of $10,000 to invest, that would mean I could “lose” $100 by investing at the wrong time.  That would totally tie me up in knots and I would be looking at the stock market trying to find the exact right time to jump in, like a kid on the playground playing jump-rope.  Of course we know from A Random Walk Down Wall Street, that all that stuff is random so there’s no point trying to time it, but I’m not totally rational when dealing with that much money.

For the blog, I did a little analysis and found that 12% of the time stocks* lose at least 1% in a single day; if I bought the day before that happened, I’m out at least $100.  On the other side, about 13% of the time stocks rise 1% or more in a day; if I bought the day after that I’d similarly be out $100.

My fragile nerves just can’t take that so I want to “diversify” the timing of my purchases to even out those big ups and big downs.  This is a strategy called “dollar cost averaging”.  So as I said, initially I would have recommended is to take the cautious path, take $10,000 and split it into $1,000 chunks, and invest those each week for the next 10 weeks.


windfall analysis 2

But then using the magic of spreadsheets and the internet, I decided to see what the actual data said.  I looked at every week for the market since 1950 and did a comparison of the two scenarios:

  1. Invest your entire chunk of money all at once
  2. Spread your investment evenly over 10 weeks (dollar cost averaging)

Wouldn’t you know that on average it’s better to invest your entire chunk at once?  I’ve been doing it wrong this whole time, so thank you Stocky Fox.  In fact it’s not even close—historically it has been better to do option #1 about 61% of the time.

The thinking is that historically, stocks have always gone up.  Sure there have been some rough patches, some of which can last a really long time, but the general trend is definitely upwards.  So if you wait to invest your money over a longer time period, you’re missing out on some of that upward trend.  I looked at every week since 1950 (if you were curious, there are about 3400 weeks) and on average you gain about 0.7% by going with option #1 instead of option #2.  0.7%!!!  Holy cow.  Remember that post on The power of a single percentage?  We just found a 1% coupon right there.

So my advice is to pick a day this week and invest it all in one fell swoop.  You might get hit with bad luck, but the odds are better that you’ll get hit with good luck to the tune of about 0.7% (which in your case is about $700).  On the day you do it, don’t even look at the stock market and have several tablets of Alka Seltzer on hand.

*For this analysis I am using the S&P 500 data going back to 1950.

Investing let me get my new car for free

A few years back our old Honda Civic went to heaven.  It had a terminal case of transmissionitis.

We bought a new Honda Fit which cost about $17,000.  However, when it was all said and done we got it for free.  This isn’t some scam or a crazy thing where we had to drive around with the sides painted as a billboard or anything like that.  This is how it worked:

In September of 2011 we bought our new car.  Our Civic had been struggling for a while so we had been saving money knowing that sooner or later we would need a new car.  Because of that we had the $17,000 in cash ready to purchase the car outright.

However, Honda offered a fairly generous financing program at 0.9% interest.  That’s a super low rate so it was very tempting.  There’s always the nagging idea that you shouldn’t borrow money if you don’t have to, but as low as it was we figured we had to consider it.

It was bit more complex, but for the sake of simplicity, let’s assume we had these two choices:

  1. Pay for the car in cash.
  2. Finance the car at 0.9% for 6 years and then invest the cash.

As you can guess from the tone of this post, we went with option 2.  Our plan was to finance the car, and then invest that $17,000 in a stock mutual fund (VTSMX).  Every month when a payment was due we could sell a few shares of the mutual fund.  At the end of 6 years we would either end up ahead, making this a really smart move, or behind making this a really dumb move.


Looking at the numbers

A 6-year loan for $17,000 at 0.9% interest requires a monthly payment of $243.  Back in September of 2011 the S&P 500 was at 1,131 (today it’s at 2,471).

Over the course of those 6 years, the market mostly went up, but it certainly had some rough moments.  2012 and 2013 were really good years for the stock market so I felt like I was a bit of a genius for doing this.  Then in 2015 stocks fell plus there were a few of those really crazy months like January 2016, when the market was in total freefall, and I felt like I was an idiot.  Stocks recovered in 2016 and then really took off after Trump’s election.

Needless to say, there were a lot of ups and down.  The smart thing would have been to just ignore the daily/weekly/monthly variations in the stock market and not get stressed, but that’s not in my character.  I did look at it every day, and I did get totally stressed out.

Foxy Lady and I stayed the course, and this month we sent our last check in to Honda.  Now we own that $17,000 car outright, the same way we would have had we paid cash for it 6 years ago.  However, the account we were using for all this still has about $16,400 of mutual funds in it.

That’s awesome.  We bought a $17,000 car, but we ended up with a car and $16,400!!!  In a way the car was very nearly free.  We started this process with $17,000 and no car.  We ended this process with $16,400 and a car.


Were we lucky or good?

Our story had a happy ending, which begs the question how likely does it turn out this way.  The six years from Sep-11 to Aug-17 were a good run for stocks but by no means the best.  Going back to 1950 when the S&P 500 started, you can see how things stack up.

There are a couple important points.  First, success isn’t guaranteed here.  You would lose money (have to pay more than your original $17,000) about 18% of the time.  We know that over the long-term stock almost always do well.  This is a bit trickier because when you start this, you invest all your money at one time, so you don’t benefit from dollar cost averaging.  Had you invested right before a huge market downturn (think late 1960s to early 1970s or Mar 2001 or Aug 2008) that would really be awful timing.  Still, you come out on top 82% of the time, so those are pretty good odds.

Second, our timing was pretty good, but certainly not the best.  We would have done better 13% of the time.  The absolute best timing would have been if we did this scenario starting in September 1994 and ending August 2000.  Basically, that timed the investment just before the internet boom of the 1990s kicked off, averaging about a 24% each year.  If you’re curious, with that timing you would have ended up with a car plus about $25,000.

We can’t be lucky all the time but you don’t really need to be either.  You can look at a more average performance, let’s say starting in September 2002 and ending in August 2008.  You would have ended up with a car and $8,000, so basically you got a new car at a 50% discount.


Take free stuff

The other really important piece to this is the really low interest rate we were charged.  0.9% is not a normal interest rate.  As we discussed here about debt, sometimes it’s a good thing to take on debt.  Honda gives their car buyers an artificially low interest rate as an inducement to try to increase sales.  It could just as easily be cash back or lowering the cost of the car.  As it is they decided to give a really low interest rate.

Some car buyers would need to finance their purchase no matter what, so that 0.9% was just a bluebird.  Others, like us, had the choice: do we pay in cash or finance.  Had we paid in cash, we would have basically been leaving this sweet perk from Honda on the table.

We can pretty easily see the impact of using a more normal interest rate on our experience.  At 0.9% we ended up with the car and $16,400.  However, if we use 5%, then we still come out ahead, but not as much.  Instead of $16,400 we ended with $13,000.  Actually, I was a bit surprised that the impact wasn’t greater, but that’s why you have spreadsheets, right?

When all is said and done, hopefully this illustrates the point that being smart with investing, and really understanding what is likely to happen based on history, can really be lucrative.  Obviously this will apply to things like your 401k and IRA, but it also applies in more unexpected places like buying a car.

The Trump stock bubble

The normally very calm and thoughtful T. Lee (a good friend from my Medtronic days) expressed some strong anti-Trump feelings in a comment a couple days ago.  That puts him in good company with a large portion of the country.  But then he asked the following question:

“At what point, if there is one, should we consider pulling our money out of stocks and investments and holding cash, based on the disorder, confusion, and unbelievable uncertainty this tiny man of a president is causing domestically and abroad? Are there any telltale signals? I also ask because the housing market and stock market are at historic highs, and seem due for a pullback. I know it’s impossible to time the market this way, but just wondering perhaps there is an exception under extraordinary times.”

Let’s dig into this and see what we come up with.


Things aren’t that bad

Times are insanely partisan right now.  If you don’t like Trump it’s easy to think we are on the brink of oblivion, but things aren’t really that bad.  Let’s look at some times when things were REALLY bad and how stocks did (some of this is from a post I did a couple years ago so you can check that out here).

Let’s think of the worse times in the past 100 years.  A short list probably includes the start of WWII, the atomic bomb dropped, and the assassination of MLK.  In each of those things look bad, really bad, and maybe we would have thought that things were about to fall apart:

When Hitler invaded Poland and started World War II (Sep 1939)

When the US dropped two atomic bombs on Japan and started the nuclear era (August 1945)

When Martin Luther King was assassinated setting of some of the worst race relations since the Civil War (April 1968)

The civil unrest that’s going on in the US right now is a drop in the bucket compared those examples.  Even so, when things looked darkest, being an investor turned out to be a good thing.  That table looks at if you invested $1,000 per month starting at that bad event in the Dow Jones index, and how you would have ended up over different time periods.   Over a 20- or 30-year time horizon we know that we almost always come out ahead.  That definitely held true even in these examples.

I don’t think we have anything to worry about as investors because of Trump or all the current drama.  It’s important to keep things in perspective.


Pullbacks do happen

Definitely there will be a point when stocks will pull back.  That’s just the nature of the stock market.  Given that Trump has taken so much credit for the rise in the stock market, it will be interesting to see how he tries to avoid blame when it has a bad few months or a bad year.  Of course, he has shown his ability to grab credit and shed blame as well as any politician, so I’m sure he’ll come up with something.

In my post where I proved I was smarter than a Nobel Prize winner, I based that on the fact that two years ago Robert Schiller predicted stocks would not do well.  I disagreed and was much more optimistic.  Since then stock have been on a major tear, so there you go.

But it can’t last forever.  Here are the stock returns for each of the last nine years since the Great Recession: 28%, 17%, 8%, 9%, 29%, 9%, 0%, 13%, and 12% so far this year.  That’s a dream, and eventually we’ll take a pause from that incredible pace, but of course we don’t know when that will happen.  Robert Schiller, one of the very smartest people in the world, predicted it a couple years ago.  Maybe it will be this year (I did suggest maybe we’re seeing some early signs), or maybe it will be two years from now.  If it’s two years from now, there could very well be another 10% or 20% upside that you don’t want to miss.  As always I recommend holding tight and doing the long-and-steady investment strategy.



Despite the craziness going on in the White House right now, things actually seem fairly strong in the economy which makes me think a huge bubble burst unlikely.  If you look back over the past major financial bubbles in the US three come to mind—the Great Depression (1929), the Dot com bust (2001), and the Great Recession (2008)—the issues that caused those don’t seem to be in place.

Of course, it’s impossible to predict what will cause a bubble but if we look at those in turn I think we’ll see that things look okay.

Great Depression—That was the big one that was caused by a perfect storm of bad stuff.  You had an insane asset bubble that captivated the nation and was held up by fraudulent companies.  It was so bad that most of the SEC laws came about afterwards.  What is going on now isn’t anywhere close to that.

Dot com bust—Again we had an asset bubble where stocks that had no profits, and no prospect of getting profits any time soon were being valued through the roof.  Maybe there’s a bit of that now, but it seems fairly tame compared to back then.  Now companies like Amazon and Apple dominate the news, but those are very profitable companies.

Great Recession—This actually had little to do with the stock markets but more to do with the big bets banks were making backed up by small amounts of equity.  Things went bad for a bit, but then rebounded quickly.

That’s a quick rundown, and there’s a lot of detail we could go into for each of those, but none of those telltale signs seems to be with us now.  Banks are stronger than they were, there doesn’t seem to be widespread fraud, and the stocks driving the market are profitable.  But bubbles by their nature are hard to predict, so who knows.

That said, I will give you the steady advice that I always do which is to sit tight, do dollar cost averaging, and in the end you will very likely come out ahead.

Democrats are the best party for the stock market except . . .

. . . when Republicans are


“Politics suck” –everyone on Facebook

Given the incredibly bitter political partisanship affecting the country right now, it only seemed right to throw fuel on the fire by asking an incredibly incendiary question like: which political party is better for the stock market?

The stock market is a tricky mistress to the political parties.  Republicans seem to openly court this mistress with their pro-business and more capitalist policies.  When the stock market does well that is seen as a success.  Ronald Reagan’s trickle-down economics would have the stock market winners, who tend to be clustered among the wealthy, spend more and benefit everyone.

Most recently, Donald Trump has hailed the tremendous bull market during his presidency as a sign that his policies are working.  In case you’re curious, the S&P 500 is up over 15% since he was elected.   That’s pretty good, but certainly not the best.  Since 1950, of the 10 presidents who became president after being elected (I’m not counting Johnson or Ford), Trump ranks 3rd highest, behind John Kennedy (23%) and George HW Bush (25%) over similar time periods.

It’s a bit more complicated with Democrats with their more progressive agendas and socialist policies.  But make no mistake, Democrats want stocks to do well too.  Good stock markets are correlated with low unemployment.  When the stock market does well tax receipts are up.  One of the core bastions of Democrat ideology, the pension fund for public employees is nearly totally dependent on a strong stock market.

Whatever, that’s all politics.  You can agree or disagree with my thinking, but I don’t think there’s any doubt that both parties want the stock market to do well.


Republicans or Democrats?

So that leads to the big question: which political party does better with the stock market?

Here’s a table with a lot of data.  It shows the average return as well as the number of years since November 1950* for each scenario:








(7 years)


(22 years)


(8 years)


(37 years)



(8 years)


(18 years)


(4 years)


(30 years)



(15 years)


(40 years)


(12 years)


(67 years)


There have been 37 years of Republican presidents and 30 years of Democrat presidents.  The average return for Republican presidents is 5%, for Democrats 12%.  Clearly DEMOCRATS are better, but wait . . .

Republicans have controlled both chambers of Congress 15 years, Democrats 40 years, and it has been split 12 years.  The average return for Republican Congresses is 14%, Democrat Congresses 6%, and split Congresses 8%.  Clearly REPUBLICANS are better, but wait . . .

Republican presidents have had a Republican Congress for 7 years where the average return was 12%.  Democrat presidents have had a Democrat congress for 18 years with an average return of 10%.  Clearly REPUBLICANS are better, barely, but wait . . .

Republican presidents have served with Democratic Congresses for 22 years with an average return of 3%.  Democrat presidents have served with Republican Congresses 8 years with an average return of 16%.  Clearly . . . wait there’s nothing clear about this one.  Who should get the blame for those below average Republican president/Democrat Congress years?  Who should get the credit for those really, really good Democrat president/Republican Congress years (that was mostly during Clinton’s administration)?

There’s a lot of ambiguity here, and I don’t think there’s a clear answer.  We could argue about it on Facebook, but that’s about as fun as a root canal.  No thanks.


There must be something in the water

Since 1950 the US stock market has done really well, amazingly well.  In November 1950, the S&P 500 was at 19.51; today it’s at 2480.91.  Let that sink in for a minute.

All that data I showed you was valuable to see in that it confirmed we are on a bit of a fool’s errand.  Asking if Republicans or Democrats make the stock market do better is the wrong question.  The important observation is that the stock market does well no matter who is running things.  If you’re an optimist that means either party is filled with good stewards who keep things going in a positive direction.  If you’re a pessimist that means the the American economy is so strong and robust that the idiots in Washington, on either side of the aisle, can’t screw things up.  Either way, that is a tremendously powerful and important and comforting insight.

The day after Trump was elected, the stock market had a really good day, rising 1.1% (Reagan’s day-after-election rise was 1.8%).  That was based on expectations of tax reform, reduced regulation, and healthcare reform, to name a few.  So far, pretty much none of that has come to pass, yet stocks are up 15%.

How different would that have been if Hillary Clinton was elected?  Maybe she doesn’t sign some of those executive orders on the Keystone pipeline.  Maybe she doesn’t rollback some of the regulations Trump has, maybe she adds some he hasn’t.  All maybes.  But those are all drops in the bucket compared to the gargantuan size of the US economy and the stock market which reflects it.

My absolute belief is that a strong US stock market reflects a strong US economy and business environment.  Awesomely, that goes beyond the power of one person in an oval office or 535 people down the road a bit.  We will win no matter who is there, and that makes things a lot easier.

So my answer is: Republicans are better for stocks but Democrats are better for markets.  Wait, maybe Democrats are better for stocks and Republicans are better for markets.  I forget now.  Damnit.


*All analysis in this post is based on the S&P 500 since the midterm election in November 1950.