Coronavirus

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Holy Crap!!!  That’s really the only appropriate response to the craziness of the stock market over the past few weeks.  So over-the-top has been said craziness that I just couldn’t sit on the sidelines any more.  I had to get my stocky back on.

Let’s dive in with what’s really going on, how crazy is all this really, and if you should be freaking out?

The numbers

Let’s try to remove emotion from the craziness of the stock market for the past few weeks and just look at the facts, the numbers.

On February 19, the stock market* peaked at 3386.  The next two days it fell a bit, but then on Monday, February 24, it slipped over 3% and the freefall began.  Since then it has plummeted to 2711, a 20% decrease.  That’s a crazy fall but let’s put that in perspective.

First, before all this began, the stock market was up a bit less than 5% for the year (not bad for two months).  So really we’re just down about 16% year-to-date.  That’s certainly not good, but being down 16% feels better than being down 20%.

Second, despite all of this, we are up about 9% from where we were at the beginning of 2019.  Going back five years, and the market is up about 32%.

You get my point.  This is definitely bad, but I think one of the things that makes it so bad is that the pain has been so focused.  Who knows what next week will bring (I am writing this Sunday night after the cubs finally went to sleep).  Maybe the market is taking another dump on Monday morning as you read this.  But those historical numbers seem decent.  If someone told you at the beginning of 2019 that stocks would be up almost 10% over the next 15 months, I think you’d probably take it.

Historic context

The past three weeks (17 trading days) have been bad, even by historical standards.  But how bad really?

In the past 17 days we are down 20%.  Since 1928, there have been 15 other periods that bad or worse.  Over 90 years, this has been worse 15 times.  That doesn’t seem all that bad, actually.

Of course, that doesn’t mean this happens every six years or so.  It’s much more lumpy.  As you would probably guess, most of those 15 periods come from the Great Depression, eight of them in fact.  That accounts for half of those instances.  Needless to say, the Great Depression was a colossal economic calamity the likes of which we’ve never seen since.  This is not going to be another Great Depression.  Not anything remotely close to that.

The others are a smattering of instances around World War II (1937, 1938, 1940, 1946), the biggest single day fall in the stock market’s history (1987), the dot-com bubble (2002), and the Great Recession (2008, 2009).

This time seems a bit middle of the road compared to those mega-examples.  The graph shows the stock market in the three weeks before the you-know-what hit the fan and the three weeks after.  What we are going through today is in the bright red line.

This gives me a bit of comfort.  Coronavirus had a steeper fall than most, after three weeks (where we are today), it was as good or better than any of those examples.  In the following three weeks thing improved in every case (for the Great Depression it got a bit better as you can see, but then the bottom really fell out).

Of course, it’s impossible to predict the stock market, but I tend to think things aren’t nearly as bad as the stock market’s performance would lead you to believe.  Let’s say I’m 70% optimistic and 30% pessimistic.

The argument for stocks recovering quickly

If you compare what we’re going through to the dot-com bubble and the Great Recession, I think we’re in a lot better shape.

In each of those examples, there were fundamental and systematic problems with the stock market and the economy.  In 2002 there was rampant accounting fraud (Enron, Worldcom, Qwest, etc.) that made it impossible to invest based on trustworthy information, the lifeblood of the stock market.  In 2009 the banking system was collapsing, threating to grind the wheels of commerce in the US to a halt.

Coronavirus just doesn’t seem all that bad in comparison.  Those were deep, dark issues that took a long time to unwind and correct.  That doesn’t seem to be the case here.  In the next few weeks the number of new cases will peak.  Social distancing, warmer summer weather, and the miracles cooked up by the pharmaceutical industry are going to fix this.

If you look at data from China (not a good idea since I don’t trust their data) and South Korea (I trust their data more), this doesn’t last very long.  South Korea started getting cases on February 19, and the US started getting cases on March 2; so we’re about two weeks behind them.  Their new infections peaked on March 3; if ours follow suit we should be peaking this week.  Even if it takes us twice as long to peak, that’s only another few weeks.  That doesn’t seem all that bad.

Things are starting to turn for Koreans positively in other ways too.  People are starting to recover to the point where the total number of people infected is flat—every day just as many people are considered fully recovered as there are new cases.  Also, their death rate is falling precipitously.

Even if it takes us twice as long to peak and then flatten as it did in South Korea, that’s only another few weeks.  That doesn’t seem all that bad.  It’s definitely better than the Armageddon scenario that seemed to be priced into the market right now.

Going into this, the economy, especially the US economy, was quite strong and there’s no real reason to think that will change.  Banks aren’t going to start much stricter lending regulations as was the case in 2009.  You don’t have entire industries that we thought were very profitable and now we know are unprofitable as was the case in 2002.

Once we get the all-clear, there’s no real reason to think things won’t go back to normal, or maybe even better than normal as we work off some of that pent-up demand.

The argument for stocks still facing trouble

As optimistic as things look for South Korea, they look that bleak for Italy.  Italy got their first cases a few days after South Korea, but they have yet to peak.  Everything is on total lockdown and there isn’t an end in sight.

If we end up looking more like Italy than South Korea, that’s bad, obviously.  Reasonable people can debate which is the better analog.

As it stands, in the US, the hits keep coming.  Major components of industry are shutting down (mostly sports, travel, tourism, and conventions).  Very honestly, this became real for me last Wednesday.  That’s when the NCAA announced fans wouldn’t attend the basketball tournament (I had tickets) and the NBA cancelled the season (the NBA playoffs are my Christmas).

On Friday we started an international travel ban.  Yesterday our state joined many others in cancelling schools for kids.

There’s an obvious human cost to all that, but there’s also an economic cost, one that will never be recovered.  You can’t get the revenue for those tickets back, enjoy those cancelled cruises, fly on those cancelled flights.  That’s all gone.  At a minimum that’s probably 3-5% of the value of the stock market.

And that’s if things go right.  There’s a lot of reason to believe that other industries might need to shut down.  There’s also a lot of reason to believe that this might take months rather than weeks.  As those things happen, it will get worse for stocks.

So there you go.  That’s my take on all this crazy coronavirus mayhem.  Sadly, this has given a lot of material for future posts, so you should expect another post from me on Wednesday.  Ha, ha!!!  That’s not sad, that’s great news.

*Unless otherwise stated, I’ll be using the S&P 500 when I refer to “the market”.  For stock data before 1950, when the S&P 500 began, I am using a “proxy” of the S&P 500 that Yahoo!Finance has created going back to 1928.

How much should you be saving for your kids’ college?

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Saving for college is a major issue when it comes to personal finance.  When I talk to people, it’s nearly universal that people say their financial goals are to “have enough to retire comfortably” and to “pay for their kids’ college so they don’t come out with loans.”

If that is your goal, that begs the question: How much should you be saving each month?

Obviously this is a very complicated question.  This is not a one-size-fits-all situation since there are so many details that make can make things vary substantially.  Probably the biggest one is how much the total cost of attendance will be for your kid’s particular institution.  That said, we can look at some broad averages.

The type of school

As you know, I actively question the value that colleges deliver in this day and age.  When I look at the costs of attendance, that just reinforces the idea that colleges are WAY OVERPRICED.  That said, let’s assume we have two broad choices for college:

In-state:  Parents will get a huge break if their kids go to a public in-state school.  The “top” state school in each state tends to cost about $25k for total attendance.  Certainly there’s a range—UCLA is about $34,000 while University of Massachusetts is about $19,000.  However, don’t think those lower costs are charity.  Your tax dollars are subsidizing those lower costs.

The cost of University of North Carolina-Chapel Hill, in our home state, is about $24,000.  Also, that’s a number that easy to work with since it’s divisible by 12, so let’s go with that.  We’ll assume that in-state expenses at a good school are about $24,000.

Private/out-of-state:  If you don’t take advantage of that in-state subsidy, costs get higher very quickly.  Private schools can range from about $25,000 to as high as $70,000.  Since most of the schools that you think of when you think of private colleges—Harvard, Duke, Notre Dame, etc.—are in that $70,000 range, let’s use that as our number.

How much to save

Maybe time got away from you and you are getting a really late start.  Your child is entering college this year.  The math here is pretty easy.  Each month you’ll have to come up with 1/12 of the annual cost of college.  For a public school, that’s $2000 per month and for a private school that’s about $5800 per month.

Those are big numbers, but the good news is if you plan for it and are able to save sooner, those monthly contributions become a lot more manageable.

If we look at the other extreme, we can calculate what would happen if you started saving when the child was born.  This is a bit more complicated because there are two powerful factors at play. 

First, tuition costs for college are always rising (I’ll spare you my rant, but suffice it to say it’s ridiculous).  Let’s assume that on average college costs increase about 3% each year.  That means that $24,000 annual cost for a state school this year will be compounded 18 years by the time your child enters college.  That’s a big deal, increasing the cost from $24,000 to about $43,000.  Ouch!!!

Time doesn’t help us there, but it does help us in the way you probably expected.  Second, the money we save each year can be invested.  If we assume a 6% return, that becomes really powerful, as we all know.

The calculations aren’t easy and I do them on a spreadsheet.  At the end of the day, you’d need to save and invest $350 each month to pay for a child’s 4 year public college education.  If you go private, that number increases to a bit over $1000 each month.

Of course, real life probably puts most of us in the middle between those two extremes—starting when the kid is born and starting when the kid starts college.  This makes sense.  When the kid is born there are a lot of expenses and other things going on, so it’s not always easy to start right away.

Here is a table that shows how much you’d need to start saving each month based on the year you start.

Kid’s age you start saving Public Private
0 $351 $1,024
5 $460 $1,343
10 $650 $1,896
15 $1,070 $3,119
18 $2,000 $5,833

I don’t know if that chart fills you with optimism or pessimism.  Obviously the sooner you start the less you have to save.  I was a bit surprised by how much just a few extra years helps.  If you started saving when your kid is 15, you have to save about half of what you’d need to if you started when they enrolled.  That just shows that it’s never too late to start.

On the other side, if it takes you a few years to get everything lined up, and you don’t start saving until the child is 5 years old, you don’t have to come up with a lot more than if you started when the kid was born.  So that means you shouldn’t beat yourself up too much if you had to wait a bit.

Either way, if you decide that college is right for you child and that you want to help them pay for it, I hope this helps put those financial requirements into perspective.

What is causing all the crazy market swings (part 2)?

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Welcome back.  Last week I started listing off reasons we’re seeing so much more volatility in the stock market. In this blog I’ll take you home.

 “Skynet becomes self-aware at 2:14 a.m. Eastern time, August 29th.” –Terminator 2 (1991)

Terminator 2 - 5

Computer-initiated trading drives a major, and increasingly larger, portion of the volume in stock markets.  It’s a good thing for a few reasons.  It gives people more options in their trading strategies, it offers precision that humans can’t match, it doesn’t get tired or forget or anything like that.  But it also leads to a lot of volatility.

One of the major types of automated trading is “stop-loss” trades.  This is when someone owns a stock like Nike and says something like: “I only want to sell it if it starts to fall.  Right now the stock is at $50, so sell it if it goes below $45.”  Emotionally it makes sense.  Everyone knows crazy things can happen with stocks and it can all go to hell in the blink of an eye (see: Enron or Worldcom or Blackberry).  So as the name implies, this stops your losses at some level you establish.  Awesome.  You have more control.

The reason this increases volatility is that this type of trade tends to compound the problem.  When stocks are going down these stop losses trigger which sells more stock which drives the prices down further which triggers more sell orders and so on and so on in a downward spiral.  The obvious flaw is that the computers which are doing this don’t have any idea of the intrinsic value of the stock they are selling; they just know they are supposed to sell when the stocks hit a certain level so that’s what they do.

When rational humans look at these types of situation (maybe like Boeing on July 12) and can “see” that the market is overreacting, things tend to go back to levels that make sense.  Probably the best example of this is the Flash Crash of 2010.  On May 6 of that year, probably the craziest 30 minutes ever of stock trading occurred.  In a matter of minutes the market fell about 10% (equivalent to about 1700 points on the Dow Jones Industrial Average if this happened today!!!), and then just as quickly recovered nearly all the loss.

What made it so crazy was that no news drove it.  Maybe news of a nuclear war starting or a meteor on a collision course for earth would justify such a rapid move.  Of course there wasn’t that, but there wasn’t anything—no news from the Federal Reserve, no companies going bankrupt or countries defaulting on their debt, or a regional skirmish, or a refinery blowing up, nothing.

In the aftermath, the leading theories all ultimately pointed to automated trading.  Some sell order lowered prices slightly but just enough to started triggering stop-loss orders.  That started a selling frenzy that drove prices down, leading to more stop-loss orders and in an instant everything went to hell.  Once thinking people saw this and knew that something weird was going on, they started buying those shares which were selling at 10% or 20% or even 50% less than they were 20 minutes before and made things normal again.  Like so many examples here, we ended where we started, but we had a crazy ride in the meantime.  More volatility.

“We keep inventing better ways to kill ourselves”

The stock market is an evolving landscape.  There was a time long, long ago when it was just stocks.  Then derivatives like options and futures came along as well as buying on margin (borrowing money to buy your stock); and now we have stuff like credit-default swaps (I can’t say I fully understand those), virtual currencies, and other really exotic things.  Like a gun or a power saw or a car, these financial tools can be very useful when used correctly but they can be disastrous when used recklessly.

Generally speaking these investments lead to higher volatility because they tend to be very leveraged.  You can make really, really large investments without a lot of money.  To buy 1000 share of Medtronic would cost you about $75,000; but to “buy” that same amount using call options would cost maybe something like $2000.  Of course, derivatives like stock options are much more volatile, and can lose all their value really quickly.

All the sudden that means you can be a small-time investor who decides to throw a Hail Mary in the stock market.  Instead of needing a bunch of money to take a major position, you could do it with much less.  Realistically, I as an individual probably couldn’t take such a big position to impact the market, but certainly a small bank could.  There are dozens of stories where some trader at a bank took a crazy big position, often times using derivatives, that went bad.  Not only does it take the bank down, but when that bank falls, just like dominos, others fall with it.  Same story: increased volatility.

So we’ve covered a lot of ground and come up with a lot of things that make today’s stock market much more volatile than it’s ever been in the past.  But let’s remember that the stock market is ultimately about fundamentals.  How strong are the companies?  Are they coming up with new products?  Are they finding better, faster, cheaper ways to meet our needs?  Those are the things that make the stock market go up over time.  And I believe all those things are there in today’s stock market.

In fact, of all the reasons I cited for increased volatility, I think all of them are good for the long-term value of the stock market.  Information traveling faster is a good thing; a globalized economy is a good thing; computer assisted trading is a good thing; financial derivatives are a good thing.  They’re all good and they all are making stocks continue to be a good investment.  Remember, stocks have been on a relentless climb for over a century.  In 2015, despite all the craziness, we were still hitting new all-time highs.

Sure, sometimes people screw things up, and because of this new age, those mistakes make a big impact.  But that big impact fades, usually very quickly.  So Mimi, as always, I think the stock market has great prospects for the long-term future, and I’m putting my money where my muzzle is on this one.  Your daughter-vixen’s retirement money as well as your grandcubs’ college funds are fully invested.

What is causing all the crazy market swings?

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A couple years ago, th I did an a analysis that showed that the stocks market has gotten MUCH MORE volatile in recent years. Since then, it’s gotten even worse. That begs the question–why has the stock market gotten so much more volatile?

“Ready, Fire, Aim” –Tom Peters (1982)

Nearly everyone agrees that information is the lifeblood of the stock market.  Today, that information travels so much faster than in the past.  Something could happen in the most remote corner of the world, and you would know about it in everywhere in a matter of seconds or minutes.  Obviously quicker access to news is a good thing for society at large, and investing in particular, but it definitely exposes many investors to making big mistakes because they are acting so quickly.

marquee-787

A good example is July 12, 2013.  On that day a Boeing 787 caught on fire a Heathrow Airport in London.  Here’s some quick historic context: the 787 was Boeing’s next generation aircraft that was going to revolutionize air travel, a plane Boeing pretty much staked its entire future on.  In early 2013 two 787s caught fire, leading to the FAA and its counterparts around the world to ground all 787s until Boeing figured out the problem.  Boeing’s stock, as you would expect, got hammered.  It took Boeing several months, but they fixed the problems, got the 787s in the air again, and their stock recovered.

Then July 12 happened.  News broke that another 787 caught on fire.  Investors, understandably, concluded that the problems weren’t fixed after all and that the planes would be grounded again.  In a matter of minutes the stock cratered, falling from about $108 per share to $99.  Over the following hours and days, it became clear the July 12 fire had nothing to do with the previous problems; it was just one of those things that do happen every once in a while.  No big deal.  Two weeks later, Boeing’s stock was back to the pre-July 12 fire levels.  It was all like nothing happened; except it did happen and there was crazy volatility in the stock.

The morale of the story is that investors got the information so quickly and rushed to act on it so quickly, that they completely misevaluated the situation, and that led to a lot of volatility.  Had the news traveled more slowly, the world would have had more time for more of the facts to come out.  No matter how you slice it, the light-speed fast news makes the pace of investing faster, and when you do something faster, you tend to make more mistakes.

 “The chief business of the American people is business” –Calvin Coolidge (1925)

UNITED STATES - AUGUST 03: Official Portrait Of Calvin Coolidge On August 3, 1923, Then Vice President Who Succeeded Harding As President. He Was Elected In 1925. (Photo by Keystone-France/Gamma-Keystone via Getty Images)

We Americans are probably a bit spoiled.  There have been no wars fought on our soil since 1865 (I didn’t count Pearl Harbor, which reasonable people can debate).  There has been a consistent government since 1787 (or 1865 depending on how you think about the Civil War) without any coups or revolutions.  There’s never been a military takeover of the government, and the US government has never defaulted on its debt.  You could go on and on.

The reason that is important is that today about one third of all earnings in the S&P 500 come from outside the US.  It’s hard to find out what that number was in 1950 or 1960, but suffice it to say that that number was much, MUCH lower back then.  So we have a lot more international exposure now than in the past.

That’s a good thing because of diversification.  But it does expose us as investors to some of the geopolitical challenges that I just mentioned, that the US has been blessed to have avoided.

Also, to President Coolidge’s quote, the US tends to be oriented towards business (and some, but not I, would argue too oriented towards business).  This has definitely helped us become the largest and strongest economy in the world.  But other countries have other orientations (I’ll try not to use too blatant of stereotypes to offend my international readers): the Middle East is very theocratic, Japan focuses on saving face (keeping it from writing off bad debts which has stalled its economy for two decades), China is very authoritarian, Europe is more socialistic.  That doesn’t mean any of those other perspectives is bad.  But it does mean they are less likely to drive greater business and productivity, and those are not good if your goal is to have your stocks grow.

If you’re exposed to those geopolitical landmines as well as those competing priorities, it shouldn’t be surprising that the road won’t be as smooth.  And that’s just French for saying more volatility.

“The world is getting smaller” –Mark Dinning (title of a song from 1960)

Somewhat related to the above issue, the world is getting smaller (don’t think the irony is lost on me that a phrase we use to describe how fast the modern world is changing came from a song two decades before I was born).  Everything is so much more connected now, whether it be products (your car is connected to the internet which depends on satellites and under-water fiber optic cable) or countries (the components for your phone probably came from a dozen different countries).

All that interconnectivity is a good thing.  It means people/companies/nations can specialize in what they do best, allowing us to get the best products and services at the lowest prices.  But that connectivity also means that when the stone falls in the pond in one part of the world, the ripples hit everyone in some way, big or small.

Back in the day when the US economy was largely self-reliant, and even local economies were fairly independent, if crazy stuff happened across the world or even across the country, it didn’t affect things at home that much.  That impacts volatility because something is always going crazy somewhere.  And of course, that carries over to stocks which react to that craziness.  Gone are the days when General Mills was a regional foodstuffs provider for the Midwest; now its stock is affected by the Los Angeles longshoremen striking, the drought in sub-Sarahan Africa, and the revaluation of the Argentine peso.  Once again, more volatility.

This seems like a good stopping point.  Come back on Monday, same fox time, same fox blog, for the exciting conclusion to “What the hell is going on in the stock market?”

How we came out ahead on health insurance

Readers who’ve been following the blog for a while know that in early 2018 the Fox family had to go out on our own to get private health insurance.  I did a three-part post on it here and here and here.  It was a big change from always having had private insurance through our employers.  But we did it.

Here’s how everything looks a year later.  If you don’t want to read the whole thing here’s the punchline: We had our sickest year in the past 5 years, but we still came out ahead about $16k.

What we got

When we were looking at our different options, there were two broad choices that we had to make.  We could go with a full-blown Obamacare plan that provided comprehensive coverage for everything, similar to what we had when we got insurance through our job.

Or we could go with a much more stripped down plan that offered a high deductible, but put a cap on our expenses if some type of medical catastrophe happened.

All four of us had always been relatively healthy, and since the Obamacare plan cost about $2200 per month while the stripped-down version cost $600 per month, it seemed like a no-brainer.  We went with the stripped down version.

For a cost of $600 per month we got access to the health insurer’s negotiated rates.  Plus, there was a cap of $25,000.  If something horrible happened we wouldn’t be bankrupted.  And on we went.

Just like all things, the first purchase we made probably wasn’t the best.  At the beginning of 2019 we weren’t rushed like we were the first time.  I was able to shop around look at a lot of different options.  We found a similar stripped-down plan, but this one only cost $450 per month and had a cap of $3000—better coverage at a lower price.  We switched to that, and that’s what we have now.

How we used it

Of course, once we got on a stripped-down plan our two cubs conspired to make this year the year we consumed more healthcare than any since Lil’ Fox was hospitalized for four days with croup in 2012.

Foxy Lady and I had no health issues.  We just did our normal check-ups.  For the first few months everything was fine and we didn’t have to go to the doctor at all, but then the dam broke:

  • Mini Fox broke his leg at one of those trampoline places.  Total cost $1700
  • Mini Fox got a nasty cold and had to go to the doctor a couple times.  Total cost $200
  • Lil’ Fox was the only one who wasn’t sick in the family in December but then he came down with a NASTY case of strider.  We ended up going to the doctor about six times.  Total cost $600
  • One of the times Lil’ Fox was really struggling breathing we had to go to the ER.  They gave him breathing treatments and a steroid, but then sent us home in the evening.  Total cost $2300
  • We had to get an inhaleable steroid for Lil’ Fox that was not on generic so it was fairly expensive (this is one of the places we would have saved a lot by having a full-on plan).  Total cost $300
  • Lil’ Fox went to an ENT and found that his adenoids were very enlarged, and that was largely responsible for all the breathing issues he was having.  Plus, his tonsils were infected and were the perfect place for nasty bugs to hang out, likely allowing his cold to persist.  We took the adenoids and tonsils out.  It was considered an elective procedure so we had to pay cash.  Total cost $4000

Yikes!!!  Those are some big numbers.  And of course, the financial gods chose to humble our family by hitting us with all this the very first year we went on our own for health insurance.  Any one of those on its own would have been more than we paid in any of the previous five years.  I guess sometimes timing sucks.

Yet, we’re ahead of the game.

But as expensive as all that stuff was for us out-of-pocket, we actually ended up WAY AHEAD.  How so?

Sure, we had to pay about $9000 out-of-pocket when you add it all up.  But that’s over a whole year (14 months actually—from March 2018 to May 2019).  And the key was that the coverage we got that exposed us to those higher out-of-pocket expenses only cost about $500 per month instead of the $2200 that an Obamacare plan would cost us each month.

Do you see where I’m going with this?  Because I am a financial nerd, I track this stuff obsessively.  We paid $1700 less each month in premiums ($2200 – $500).  If we took that money and stuffed it in a mattress, after 14 months we’d have about $24,000.  Subtract that $9000 in out-of-pocket expenses (actually it would be less than that because Obamacare also has out-of-pocket costs), and you get about $15,000. 

If instead of stuffing the extra money in a mattress, we invested it in the stock market instead, so we ended up with $16k, rather than $15k.

That’s pretty powerful.  We got less insurance coverage but paid a lot less for it.  Now we have a $16k buffer to take care of any of those higher out-of-pocket costs.  Plus, our insurance does cover us for catastrophic expenses beyond $3000, so it’s hard to see how we lose this game now.  To use a gambling analogy (and isn’t insurance really just another form of gambling?), we’re playing with house money.

Should you go with Mint or Quicken?

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Quicken
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“You can’t hit what you can’t see”  –Walter Johnson, major league pitcher from 1910s

As you take more control of your personal finances, there will come a time when you need to start tracking it somehow.  Maybe you’ll be hyper-obsessive like I am and look at it multiple times a day (which objectively is stupid since the numbers don’t change that fast, but I do it anyway).  Or maybe you’ll want to see what things look like every week or every month to make sure you are on track.  Either way, you’ll need some way to track your finances.

There are two major options: a program you purchase and install on your computer like Quicken, or an internet website that consolidates your online accounts like Mint.  For the longest time I was a Quicken devotee (and before that I used Microsoft Money), and then I recently switched to Mint.  This post is going to be looking at the pros and cons of each, Dr Jack-style, to help you pick the one that will work best for you.

TRACKING SPENDING:  Both do this fairly well.  You can download your bank and credit card activity, and both do a somewhat decent job classifying the expenses into the different categories.  I think this is a bit of “the price of admission” that you should absolutely expect.

There is one feature that I really liked about Quicken that I don’t get with Mint—the ability to split expenses.  When I go to Costco and spend $300, I can only use a single category in Mint, so I use “groceries”.  However, in real life, that $300 was split into $150 for groceries, $30 for pet food, $70 for Foxy Lady’s contacts, and $50 for some pool toys for Lil’ and Mini.  In Quicken I can split that $300 expense into those different categories which is really nice when you want to compare your spending to your budget.

[EDITOR’S NOTE:  After posting this, a reader named Ashleigh mentioned that you could indeed split transactions in Mint.  It took some tinkering around but I figured out how to do it.  She was indeed correct.  That said, I must say that it’s not the most user-friendly or intuitive process.  But hey, it’s free so I can’t complain, even though I just did.]

Advantage: Slight edge to Quicken

PROJECTING FUTURE SPENDING:  This is a really nice feature in Quicken that you don’t have in Mint.  When you look at the cash flow of your checking account, it’s nice to look into the future to make sure that your balance doesn’t fall below a certain level.  So you might get a paycheck or two, but then you’ll have your mortgage, a credit card payment, and a couple bills, all of which are hitting on different dates.  That’s a lot of moving parts.

If you’re like me and you try to keep your checking account’s balance fairly low, freeing up the extra money to invest where you can get a higher return, then you need to be a little more precise.  This is probably the single biggest feature that I miss by switching from Quicken to Mint.

Advantage:  Quicken

ACCURACY:  With Mint the website downloads your transactions and then does its thing.  Most of the time this works well but sometimes it doesn’t work and the results look goofy.  Look at the picture from Mint for one of my investments.  Notice how it thinks that I invested $321.69 and that has increased $26,747.  While I would like to think that I am that brilliant of an investor, I can assure you I’m not.  For some reason the download had a bug in it.  With Quicken, you can actually go into the file and manually change things to take care of stuff like that.

Capture

Advantage: Quicken

NON-BANK STUFF:  A lot of people have financial “stuff” going on that isn’t with your bank or brokerage account.  Sometimes it might be off-the-book loans like maybe your parents helped with the down payment on your house.  With us, I have stock options that aren’t in an account compatible with Mint, so I don’t have visibility to them.  With Mint, if you can’t download them they don’t exist.  Obviously that creates a bit of a problem if you want to take these into account.

With Quicken if you have stuff like that you can manually create accounts and transactions.  It’s not ideal and certainly not as easy as downloading them, but sometimes something is better than nothing.

Advantage: Quicken

ANALYSIS:  Quicken has a lot more robust offering of analyses that you can use, including a host of reports that you can customize to show whatever you want.  I used these to track how my spending was doing to my budget as well as a report that showed how my investments were doing.  Mint has some useful reports, but it isn’t anything near as robust as what Quicken has.

However, Quicken does have a bit of overkill.  There are all kinds of reports that it offered that I didn’t use, or even worse used and thought gave bad advice.  Quicken had a retirement projection tool that I played around with.  It said that at 65 I would have something like $5 million, but that I would run out of money by 90.  Ludicrous.  I didn’t use that tool after that.

Advantage: Quicken

CONNECTIVITY:  This is one of the areas where Mint really shines.  Its whole platform is based on smooth, seamless connectivity with all your accounts.  Everything is designed to make this easy—from initially linking your accounts to Mint, to updating them.  I love Mama and Papa Lynx (my in-laws) to death, but sometimes they aren’t the most technologically savvy.  They got everything up and running in Mint without any problems, so you know it’s pretty user-friendly.

This is the main reason that I don’t use Quicken anymore.  I kept having problems where my accounts wouldn’t update.  Sometimes it was my accounts would change (like when my Vanguard account got large enough to go to their Admiral shares), other times it would be a cookie or some other technical thing on my browser that I don’t really understand.  No matter, it would be a royal pain in the butt.  I’d have one of three options, none of which were good: I could spend time with their technical support, I could manually enter the transactions, or I could just not update (what I ended up doing).  We live in a technical age, so to have this not work really well is a problem.

Advantage:  Big advantage to Mint

TECHNICAL SUPPORT:  As you would expect with a free site on the internet, Mint doesn’t offer you a lot of help if things go wrong or you screw something up.  If you click on the “get help” link it sends you to a page that recommends you try to find the answer to your problem in their community.  So basically you’re hoping that you can find someone who had the same problem you did and wrote about it.  That’s kind of an “f-you”, isn’t it?  I’ve struggled a couple times and found my answers by googling for it, and it worked but it took a bit of effort.

Quicken on the other hand has a bonafide help center.  You can chat with a real person who will try to help you.  This is what I used when I had connectivity issues.  By and large, they’re pretty good and can solve most problems with a minimum of hassle (although it’s probably a minimum 30-minute time commitment).  Maybe I’m stuck in the past, but I do like it when I can talk (either over the phone or via chat) to a live person.

Advantage:  Quicken

INTEGRATION TO OTHER PRODUCTS:  Quicken allows you to upload your files to programs like Turbo Tax and also to spreadsheets if you really want to do some hardcore analysis.  But this is another feature that I think sounds really great, but when you really think about it, it might not be all that valuable.

Take the tax thing for instance.  I supposed you could download all your stock sales from Quicken into your tax program to calculate your capital gains, but who really does that?  Doesn’t everyone just take the form that Vanguard or Fidelity or whoever sends you and plug all those numbers into your taxes?  In all the years I used Quicken I never once used these features.

Advantage:  Irrelevant edge to Quicken

COST:  Mint is free, and that is awfully hard to beat.  Quicken on the other will set you back between $50 and $100.  Plus Quicken uses planned obsolescence where their product stops working after a while (it stops connecting to the internet to update your accounts), so you have to buy a new version every couple years.  Certainly a few hundred dollars over a decade isn’t going to change the world, but I’d rather have it in my pocket than in Intuit’s.

Advantage: Big advantage to Mint

So there you have it.  Looking at it, Quicken has more advantages than Mint, and that makes sense.  Quicken is a better, more powerful product, no question.  However, Mint has probably the two biggest advantages—its connectivity and it’s free.

I appreciate that I am a power user when it comes to these things, and even I find a lot of Quickens extra features overkill, and I just don’t end up using them.  That makes me give the verdict that Mint is probably the better choice for most of you out there.  But don’t shed a tear for Quicken and their parent company, Intuit.  It turns out that Intuit owns Mint as well.  So there’s a lesson in cannibalization.

What is your opinion on Mint or Quicken or any other system you use to track your finances?

Mailbag–how to get started?

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Here’s a question that I received from a reader the other day:

Stocky—my 26-year-old son has saved about $20,000.  Right now it’s just sitting in his checking account.  What should he do with it?

–AK

The first thing is to ask if he “needs” that money for anything in the short-term.  Does he need to buy a car, or is he going to buy a house and use that as a down-payment, or something? 

If the answer to that is “yes”, then he can open an account with Vanguard or Fidelity, and invest the money in a broad bond fund like VBLTX or BND.  That will provide a decent return (about 3-4%).  Of course, there’s a chance that he could lose money, but based on historical data the chances of that are pretty low, and if he did lose money it wouldn’t be a huge percentage of his investment.  This isn’t like stocks.

Investing for the long-term

Now let’s get to the more interesting stuff.  Let’s assume that the $20k is just hard-earned savings that can be invested for the long-term.

401k—The very first place I would start is with his 401k if he has one at work.  Hopefully, he is already contributing to that at some level, and this $20k is on top of that.  The max you can contribute to your 401k in 2019 is $19,000.

With a 401k you can’t really take the $20k he has saved and put it directly into the account, so we have to do it in a bit of a two-step process.

Let’s say in his normal budget he is able to contribute $200 per paycheck into his 401k (that comes to $5200 per year).  That means that he could contribute $13,800 more. 

Crank the percentage up as high as it will go (usually something like 50%), and that will accelerate his contributions until it hits $19k for the year.  Then the law forces the contributions to stop.

That will greatly reduce his paycheck, but then that’s where the $20k he saved comes in.  He can use the $20k he saved to replace the big chunk of his paycheck that went to his 401k.  Actually, since 401k contributions are pre-tax he’ll actually only need to take $11k or so to replace the extra $13,800 he is adding to his 401k.

If he has $20k in the bank he could do this for about 2 years.  Just remember that when his $20k runs out to set the 401k contribution percentage back to a normal level.

As far as investments go, a 401k is meant to be a long-term investment so I would make sure he is invested in some type of broad stock index fund.

IRA—If he doesn’t have a 401k or even if he does, he should open an IRA.  He can do this at any brokerage, but I would suggest Vanguard or Fidelity. 

Here he can contribute directly to an IRA (instead of the two-step process for a 401k).  Once his IRA is open he can contribute up to a limit of $6000.  Just like with the 401k, this money is meant for the long-term, so I would invest it in a stock index fund. 

As he opens his IRA account he’ll also need to decide if he wants to do so with a Roth IRA or a traditional IRA.  I have written extensively on this, and generally his choice should be a traditional IRA (unless his income this year is very low—let’s say below $30k). 

After he’s made his $6k contribution ,that will mean that he’ll have a lot left over.  That takes us to a normal brokerage account.

Brokerage—These are similar to IRAs but without the special tax treatment or contribution limits.  You can open these up at the same place as you do your IRA.  So if you open your IRA up at Vanguard, I would keep it all in the family and open your brokerage account at Vanguard as well.

Once you have contributed to your 401k and IRA for the year, you can put the rest in that same stock index fund.  Next year, especially if he’s going the IRA path, he can just transfer the money from the brokerage mutual fund to the IRA mutual fund and it’s all easy.  Of course, there may be tax implications for this, but that’s one of the reasons why you want to get the money tucked away in a 401k or IRA as fast as you can.

I hope this helps.  Congrats to your son for having suck a strong head start.  Now that he’ll have that money invested, it will be turbo-charged.

How much stock should you have in the company you work for?

Retirement-Planning2

A common question investors have is “How much of my investments should be in my company’s stock?”  Many of us work for publicly traded companies (Stocky worked for Medtronic and Foxy Lady used to work for VF).  Many of those companies include stock as a significant part of their employees’ compensation.  So what is an omnivore to do?  The short answer is: Don’t invest a lot in your employer.

It adds up

The general thinking among companies is that it’s good for their employees to own company stock.  It motivates them to work hard, so then the company does better, which then raises the stock, and that finally makes the employee richer.  See everyone wins.

My sense is that before 2000 compensation in the form of stock was much more prevalent.  I can speak to my experience at Medtronic:  The default for your 401k investments was Medtronic stock.  When they did the 401k match, the match was in Medtronic stock.  They also have a program where you can buy Medtronic stock at a 15% discount compared to the market price.  You had the option to take your bonus in cash or get a larger bonus in Medtronic stock options.  Long-term incentives are given in stock and options.  High performers can get awards of stock or options.

What difference can you really make?

The company wants you to do it because collectively if a lot of their employees own stock, they are probably motivated to do better.  But as an individual, what difference can you really make?  I know that sounds anathema, like when people say they don’t vote because one vote doesn’t make a difference (I do vote in every election, but the way).

Let’s think about that for a minute.  Stocky worked at Medtronic, a company which has about 50,000 employees and earns $20 billion each year.  Actually, I think I did really good work, and let’s imagine that because I worked my furry little tail off, I was able to develop programs that led to an extra $2 million in sales.  That’s a lot actually (I think I might have been underpaid), but compared to the bigger picture, that such a tiny drop in the bucket that it wouldn’t affect Medtronic stock in any possible way.

On the other hand, if I bust my tail and work hard, my bosses will see that and I’ll get a raise and a promotion.  That’s where the real upside for me is.  Not in the impact on the stock.  I’m sorry to say that, but it’s true.  The payoff in owning stock (compared to owning a diversified mutual fund) just isn’t there.  But the downside is very real if things don’t go well (more on this in a second).

Since Medtronic is a really huge company, maybe an individual can’t make much of a difference.  But wouldn’t an individual employee be able to have a bigger impact on the company’s stock if they were at a smaller company?  Maybe it makes sense for people in smaller companies to own more of their company stock for that reason.

The logic is sound—certainly if you work at a smaller company your individual contributions will have an outsized impact.  But the negative is that your risk goes up as well.  Larger companies tend to have greater margins for error when things go bad.  If you’re in a smaller company, the risk of bankruptcy or some other catastrophic event with the stock is so much higher.  And remember, as an investor you’re looking to lower risk not raise it.  So with all this I don’t the think argument for an individual to be a shareowner so they can drive the stock upwards holds a lot of weight, especially when you compare it to the downside.

What happened to loyalty?

If you own a lot of your employer’s stock, you’re violating the first rule of diversification.  The whole point of diversification is to make sure that one company or one sector or one “something” can’t hurt you too much if everything goes to hell.  Think about that with your own company.  The single most valuable “financial asset” you have is probably your career and the future earnings that go with that.

Now imagine that something goes terribly wrong with your company (a product recall, losing a lawsuit, missing the boat on a market trend, etc.).  If you’re an employee that sucks because you’ll probably get smaller bonuses and raises; at the extreme you might get let go.  If you’re a shareholder that sucks because the value of your stock will go down.  If you’re an employee and a stockholder you get the double whammy.  That is what diversification is trying to save you from.

But wait a minute.  I can hear some people say stuff about loyalty and having faith in your company and putting your money where your mouth is.  To that I say “hooey”.  If you’re working hard every day to help your company succeed, isn’t that loyalty and faith?

Remember that your portfolio is ultimately meant to support you in your life’s goals.  For most of us that probably means securing a comfortable retirement.

Just to put things in perspective, every year a few stocks that get removed from the S&P 500 because of “insufficient market capitalization”.  That is French for “the stock went down so much the company wasn’t considered S&P 500 material any more.”  7 stocks out of 500 doesn’t seem like a lot but that’s about 1.5% of the entire index.  And remember that the S&P 500 as a whole was up 29%!!!  That was an awesome year for the entire index, yet still 7 companies couldn’t make the cut.  Imagine what would happen in an average year or even a bad year.

Let’s think about the fate of the employees at those companies for a second.  Being kicked off the S&P 500 is a bit of a slap in the face so you know things at the company aren’t good.  There’s probably a lot of things happening like stores closing, people being laid off, salaries being frozen, moratoriums of new hiring so the existing employees have to work more.  Just a bunch of bad stuff, right?  So if you’re working there life probably isn’t awesome, and the idea of polishing up your resume is probably pretty top-of-mind.

Now imagine all that is happening while a big portion of your portfolio is taking a dive (remember, these companies got booted off the S&P 500 because their stocks went too low).  Ouch.  That is definitely rubbing salt in the wound.  In the investing world managing risk, and minimizing it where you can without impacting your return, is super-duper important.  When you own a lot of stock in your company, you’re just taking on unnecessary risk.

So there we are.  There’s definitely some romantic notion of owning stock in the company you work for.  It seems like the right thing to do.  But you’re just taking on risk needlessly.  My advice is that you should really keep that to the absolute minimum.  In the Fox household, we sell the Medtronic stock when we can.  It’s not that we don’t think it’s a great company (it is) or we don’t have faith in its future prospects (we do).  It’s just we don’t want to bear the risk that something really bad could go down, leading to me possibly losing my job just as your portfolio is doing a belly flop.

How much of your portfolio is of your company stock?

When does it go from gambling to investing?

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I’ve done a ton of posts on how over time stocks are a great investment, and I absolutely believe that.  However, like with all things, if you look at the extremes you start to see funny results.  Particularly, over the very short term, stocks aren’t really good investments at all.  In fact, if you “invest” in stocks and have a really short time horizon, you aren’t investing at all but rather you are gambling.  So investing or gambling, what’s the difference?  And when does stock ownership switch from gambling to investing?

As always, this is when I nerd out and get my handy dandy computer and free data from the internet and see what the numbers say.  Hopefully it’s not surprising that the longer you hold on to an investment, the lower the probability that you lose money.  But it is interesting how the numbers work out.

On any given day, there is a 46% chance that stocks will go down.  That’s not quite a flip of the coin (since stocks go up over the long run, you’d expect them to have more good days than bad), but that’s pretty darn close.  So let’s agree that if you’re investing for only a day, then you’re gambling.

Graph

Obviously, you can contrast that with the other end of the spectrum where historically there hasn’t been a 20 year period where you would have lost money.  0% chance of losing is not gambling, that’s clearly investing.

So where do you draw the line?  If you move from a day to a week, the chances of you losing money drop from 46% to 43%.  That’s a little better, but that still feels like a flip of the coin to me.  Go from a week to a month, and the chances of you losing money drop a little bit more, down to 40%.  It’s going in the direction that you would expect—probability of losing money drops the longer you hold on to the investment—but we’re still squarely in gambling territory.  If you do something and there’s a 40% chance of it coming out bad, I definitely don’t like those odds.

You can follow the table and see that at 5 years, the chances of you losing money on stocks is about 10% and at 10 years it’s at about 2%.  Clearly there is no right answer, and this is an opinion question so everyone is different, but I figure that somewhere between 5 and 10 years is when purchasing stocks ceases to be a gamble and starts being an investment.

Recreational investing

One of the things I try to do with this blog is help people better understand the stock market and how it behaves by looking at historic data.  I think this is a good example.

As I said at the start, the stock market is a great place to build wealth but you have to be smart about it and you have to have your eyes wide open.  If you’re investing just for a month or a week or a day, just understand that what you’re doing looks a lot less like investing and a lot more like gambling.  If that’s what you want to do that’s great.  Just be honest with yourself.

This brings me to an interesting topic which is “recreational investing”.  A lot of people come up to me and say they understand that slow and steady, and index mutual funds, and a long-term view are probably the best way to build wealth.  But it’s boring (a sentiment I totally agree with), and they want to keep a small portion of their money so they can “play,” investing in particular stocks they like, similar to the way someone would pick a horse at the track or play the table games in Vegas.  To this I say: “go for it”.

Life is too short, and that stuff can be really fun.  If it’s fun for you to “play the market” and gamble on some stocks, rock on.  Just know that you’re gambling and not investing.  But I’ll tell you, if you have a gambling bug, I’d much rather do it with stocks than blackjack or the ponies.  With stocks, as we saw above, even over a short time frame, you have the “house advantage”.  With other types of gambling, the house has the edge.  So I totally support recreational investing if that’s what you’re in to.

What do you think?  At what point does buying stocks change from gambling to investing?  I’d love to hear.

The sharing economy helps kill inflation

airbnb
uber

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“Share and share alike” from Robinson Crusoe

We all know that inflation is really important in planning for a comfortable retirement.  We also know that I personally think that inflation fears are really overblown.

In this post I showed that technology is an amazing deflationary force.  A few readers (like Andrew H) have noted that technology, and especially computers, are improving at such a rapid rate that it’s no wonder they are falling so much in price.  But what about things that aren’t technology related?  There are a lot of things we buy that aren’t computers or DVDs or internet browsers, probably spending a lot more on those than the technology-related products whose prices are going down so rapidly.

While I agree that a lot of non-technology products like food, clothing, and such do experience inflation, I think there are some surprising areas that are experiencing DEFLATION.  I just tried out these new-fangled services that seem to be popular with the 20-somethings: Uber and Airbnb.  What can I say?  I never claimed to be on the cutting edge of this stuff.

Uber

Uber has been in the news a lot because it just had its initial public offering (IPO). Basically Uber is a taxi service.  With a regular taxi you’re getting in a smelly yellow “police interceptor” with a driver whose accent is so think you can’t understand him and worry that he doesn’t know where he’s going (along with all the other negative stereotypes).  But with Uber you have regular people who use their own personal car as a taxi.

First, the cars seem to me to be nicer.  They’re newer model cars; I’ve done Uber now probably four times and haven’t been in a car that is noticeably old or worn or uncomfortable.  Plus they are meticulously clean.  It’s like riding in your friend’s car, if you’re friend is a clean freak.  Advantage: Uber.

Second, they use technology well.  You download the Uber app, and when you want to be picked up you click the button.  Then you see a real-time map with your car driving towards you.  If you live in a dense taxi city like New York or Chicago, this may not be a big deal where taxis are literally around every corner.  But for the rest of us, it can sometimes be nerve-wracking wondering when (if) you taxi will be there.  A few months back I literally missed a flight because my taxi never showed up.  I didn’t know there was a problem until it was 10 minutes after he should have been there, and at that point it was too late.  Advantage: Uber.

So there you have a couple nice advantages that Uber offers, but what about the big one: price?  I’m not an expert, but I would estimate that Uber is about 30% less than a traditional taxi, especially on longer trips.  I took an Uber to Charlotte airport (100 miles away) and it was about $150; Foxy Lady took one to Raleigh airport (60 miles away) and it was about $80.  I would guess with a traditional taxi those prices would have been much higher.  For more local trips it’s harder to say, but I figure Uber comes to about $1 per mile (and Uber-aficionados, I would welcome your enlightenment).  Obviously a big part of the savings is they aren’t paying taxes to cities (a taxi medallion in Chicago or New York costs over $1 million!?!?!?  Crazy).  Also, they are just regular people using their own cars to make some extra cash.  No matter how you slice it, it does end in significantly lower costs.

So here you have a better product than we ever got in the past for a fraction of what it used to cost us.  To me that sounds like deflation.

Airbnb

Airbnb is another sharing economy website where people can put up their homes or vacation rentals up for rent.  You go to their website and it’s like picking a hotel.  You pick where you want to go and the days you want to stay there.  There’s an option to pick “a bed”, “a room”, or “the whole place”.  As a 38-year-old, I’m at a stage of life where the only acceptable option there would be to get the whole place, but if you’re younger and strapped for cash or want to meet new and interesting people maybe that’s something you’d want to do.

Anyway, we had a recent trip to Hawaii where we used Airbnb.  We found a really nice condo right on the beach for about $900 for the week (about $140 per day).  There were a couple things that struck me about this.  First, the price seemed really good.  My experience tells me that $140 per night will get you a nice hotel room in a mediocre location or a mediocre hotel room in a nice location.  So we were probably paying what we’d pay for a nice place in a location like Des Moines, but we were in Hawaii, so that seemed like a nice win for Airbnb.

Second, our place was really nice.  It was someone’s actual house.  As it turns out, they travel a lot for some job in the entertainment industry, and they end up being at home about 30 weeks per year.  Those other 22 weeks their place sits empty; they choose to make a little money by using Airbnb on their place, so good for them.  Back to the point, it was a full-on place with a living room, kitchen, balcony, and bedroom.  So compared to a 250ish square foot hotel room, we had a bonafide 800ish square foot apartment.  Big advantage for Airbnb.

Third, you’re dealing directly with the owners.  Our experience, plus what I have heard from a lot of others, is that the people whose homes you rent are really nice and accommodating.  They are letting you have their place for a little bit and they genuinely want it to be a good experience for you.  From our host, we got some nice restaurant recommendations.  Not that people who work for hotels aren’t nice, but you just seem to have a deeper connection with someone when you are taking over their property.  You want to be a good guest and they want to be a good host.

Finally, the place was just more comfortable.  Partly because it was larger, but also because it was someone’s home and that made it easier to be our home.  We were able to have a couple nice dinners at home looking out on to the ocean.  I finished up the last Game of Thrones book sitting on the balcony, and I didn’t feel all crammed up in a hotel.  It was just really nice.

So again, just like with Uber, Airbnb offers what is definitely a much, much better product, and they are able to do it at probably what you’re paying to a medium-caliber hotel.  Put those two ingredients together and you get . . . DEFLATION.

The point of all this isn’t Uber or Airbnb, per se.  It isn’t even diving into the sharing economy.  Rather the bigger picture is looking at how inflation is supposed to be raising the price of everything, and if you look at things closely it kind of is.  Cab fares go up every couple years, and hotel rates are constantly increasing.

But we live in the most innovative and dynamic of times.  People are finding ways to bring us better products at lower prices.  If you broaden that view to “a place to stay while I’m in Hawaii” you don’t have to get that hotel whose prices go up about 5% per year.  If you broaden that view to “safe and clean transportation to Charlotte” you don’t have to go in a cab whose rates the states allow to increase every few years.

And remember that at the beginning of this blog we said that most people agree that technology areas are likely to have prices fall, but more traditional areas will still experience inflation.   That’s true to some degree, but aren’t hotels and taxi pretty opposite of high tech?  And we just showed that their prices are coming down.  This is just another corner of the economy that is giving you more for less—deflation.  Another reason why I think inflation concerns are way over inflated (ha, ha.  Did you see what I did right there?).