November 2015 – The Stocky Fox

Inflation killers–the sharing economy

November 25, 2015November 24, 2015 Stocky Leave a comment

“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 is basically 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?).

Premade investments

November 23, 2015November 22, 2015 Stocky Leave a comment

As you, my loyal readers know, I quit my job at Medtronic to be a stay-at-home fox with our two little cubs. As part of all this, Foxy Lady got a sweet job with the good folks at VF Corporation (who bring you fine apparel brands like The North Face, Timberland, Seven for All Mankind, Vans, Reef, and many more). It’s a great opportunity for her, but the one downside is that she travels a lot.

That means that I find myself at home fairly often with the boys, needing to make dinner. I’m not completely helpless in the kitchen but I am no Foxy Lady (she is an amazing cook). Also, it’s hard when you have two little guys underfoot, not always being very cooperative. Hence I find on those occasions, sometimes premade meals work really well. My personal favorite is the frozen lasagna from Costco—really good and I highly recommend it.

Now this post isn’t about premade meals for parents who are double-teamed by the ankle-biters, but premade meals got me thinking about premade investments. When I buy that frozen lasagna from Costco, one meal (enough for 4 people) costs about $8. That may not seem like much, but if you broke down the ingredients and added it all up, it actually starts to seem like a lot. There’s probably four lasagna noodles (my guess is that would cost $0.30 total if you bought them on their own), a quarter of a pound of cheese ($1), half a jar of sauce ($0.50), and a half pound of sausage ($2).

If you could buy all that stuff separately for about $4, why is Costco charging me $8 for it? That’s a 100% markup!!! Obviously, there’s the whole convenience factor. I could make lasagna from its core ingredients, spending an hour or two preparing it, dirtying three or four pans, and probably screwing up at least two or three steps. Or, for a mere $4 more I can have someone else do all that and have it all ready for me. With lasagna I will pay the extra for someone else to do the work, but what about investments?

The different types of premade investments

In the financial world, individual bonds and individual stocks are the only “ingredients” that are really from “scratch”. Everything else is “premade” to a greater or lesser extent (no more words in “quotes” for at least 3 paragraphs).

Mutual funds (or ETFs which are really the same thing)—the most common are mutual funds where someone else buys a bunch of stocks or bonds, mixes them all together into a portfolio and then you buy shares of that portfolio. Costs for mutual funds vary (as you have read here ad nauseam) but index mutual funds tend to have very low costs, probably the lowest cost investment you can get if you don’t do it from scratch (buy the stocks and bonds yourself).

Target funds—this is a new innovation we talked about here. Basically they take the date you think you’ll need your money, when you plan to retire for instance, and they mix stock mutual funds and bond mutual funds to balance your asset allocation. So if you plan to retire in 30 years, you would get a 2045 target fund. Right now it is mostly in stock mutual funds since you have a long time until retirement but it will slowly shift that more to bonds and cash as you get closer to your target date. These are a “little more work” than regular mutual funds and they tend to cost a little more, about 0.25% compared to 0.10% for a stock index fund, but they still tend to be on the lower end of costs (dang, I couldn’t keep my promise).

Whole life insurance—This is an investment vehicle that basically says something like “you give me $1000 per month and I will give you $500,000 when you die, when ever that happens to be.” Because it’s a certainty you’ll die, it’s a certainty that you’ll get that $500,000. In that way it acts like an investment. On the spectrum between from scratch and premade, it sits pretty far on the premade side of things. Basically someone is taking your money and investing it for you (along with all their thousands of other clients), and giving you money at the end of the game. There’s a huge element of uncertainty here, namely when you die, but if you use some basic probability calculations you can come up with a rough estimate of how much they charging you for this service. Brace yourself, because it’s a lot: about 4-5%, which is a ton when you compare it to the 0.1% that an index mutual fund charges. Remember the power of a single percentage? Here you’re talking 4%, so it’s a lot.

Annuities—Whole life insurance’s bizarro cousin is an annuity. Basically you pay a bunch of money for an annuity, let’s say $500,000, and you get a monthly payment until you die, let’s say $1000 per month. So you can see there are a lot of similarities to whole life insurance in that the annuity company takes your money (along with all their thousands of other clients) and invests that money. They take those investments and pay you your monthly check. And you guessed it, similar to insurance the fees (after you tease out the uncertainty of when people die) are extremely high.

Loss of control

Another negative (or positive, depending on your perspective) about premade investments is that you lose a lot of control in your investment choices. If you go back to my lasagna example, I don’t really have a lot of choice in the product that I purchase. If I really want gluten-free noodles, I’m out of luck; or non-pasteurized cheese, or humanely raised beef, or organic sauce. There are probably only five or six frozen lasagna choices out there, and the odds are super low that I can find a brand that perfectly aligns to my wants. When you get everything premade, you lose that choice.

Similar with investing, the closer you get to the original ingredients (individual stocks and bonds), the more control you have. If you don’t want companies that sell tobacco (or alcohol or non-sustainable agriculture or fracking or . . . ) you can make that choice; with annuities or life insurance or other “premade investments” you kind of take what they give you. Sure you can vote with your feet, but I think you’d have a hard time finding an annuity company that does invest in the four things you like but not the two that you don’t.

Maybe that choice is important to you, and maybe it’s not. With lasagna I really don’t care—conventional or organic really doesn’t matter to me. With investing I do care because I know that things like costs, diversification, and others matter a lot and I can manage those pretty easily.

The costs of premade investments

The point of all this is there’s a whole range of costs that go along with investments. As you know, I am a hawk on investing expenses, as I think it’s one of the main ways you can really move the needle on increasing your returns. But not everyone is like me. And just because something is expensive doesn’t mean it’s not worth it; it’s all about the value you get.

So coming full circle, I am willing to pay almost double to have someone make the lasagna for me so I can just pop it in the oven. It’s about $4 and to me it’s totally worth it. I don’t have the time or the skill or the energy to futz around with that while two little boys are trying to play kiddie golf in the living room. Of course there are some who, when faced with that choice, go with the less-expensive but more time-intensive option of making the lasagna from the core ingredients.

Investing is the same way. You can have someone do it all for you. The extreme example is an annuity where you give them all your money and they manage it for you and give you a monthly check. That’s a pretty worry-free approach. But it’s expensive. If you make that choice, there’s nothing wrong with it. Just make sure you are making an informed choice.

Top 5—Financial moves when the stork is coming

November 4, 2015November 1, 2015 Stocky 2 Comments

A lot of our readers are starting their families or have younger kids. Foxy Lady and I have been so blessed to bring two wonderful little cubs into the world. As you embark on parenthood and rearing little ones, what are the financial considerations you need to make? Surprisingly, I don’t think there are all that many:

5. Set up your health insurance. Depending on when you find out your pregnant, the chances are you will have an enrollment period with your health insurance. Foxy Lady and I screwed this up twice since both of our boys were born in October (we found out we were pregnant in February so we missed the open enrollment while pregnant), but let’s imagine that found out that we were pregnant in October and the baby was due in June.

When open enrollment comes around every December and goes in effect in January, we would have bought the primo policy that gives the best coverage. Normally, we don’t pick the Cadillac policy that our work offers because we’re relatively healthy and don’t go to the doctor a lot. Under normal circumstances we get a middle-of-the-road policy. If we happen to have a medical issue (like with ‘Lil Fox in 2014) we know we’ll spend a little more in out of pocket, but that doesn’t happen very often so we generally come out ahead.

However, when you’re expecting you know for sure you’re going to spend a lot of time in the hospital and you’re going to have a lot of doctor’s visits, and that gets expensive. If you know this is coming, get the insurance policy that has the higher premium every paycheck but then covers most or all of those expenses. Had we done this with our boys, we probably would have saved $3000-4000 on each little guy. As it is, I’ve told both boys they owe us that money and it should be treated as a loan accruing interest, but neither has acknowledged the righteousness of my claim.

4. Set up your flex spending account. Similar to #5, if you’re having a baby you know you’re going to have some medical expenses. Make sure at open enrollment you set up your flex spending account to pay for those. With flex spending accounts you can pay for medical expenses using before-tax dollars. So that $2000 you had to pay with pre-tax dollars only feels like $1300.

Also, once you have kids, you can use a flex spending account to pay for childcare. The government allows up to $5000 per child to be tax deductible (I’m not a tax expert, but that’s my understanding) if you use a flex spending account. Spending $5000 in pre-tax dollars instead of after-tax dollars is pretty sweet. And for childcare it seems like a no-brainer that amounts to about $1500 per year. Most of us know for sure that we’re going to have childcare expenses. Why not spend the hour it takes to save that money (if $1500 isn’t worth an hour of your time, then I’d like for you to help me with my finances).

3. Steel yourself against crazy “baby” spending. Definitely when you are going to have a baby there is a lot of stuff that you need, and this is especially true for your first child. But for everything item that you do need there are probably 5 that you don’t need. Baby stuff has become a big business and the people who market this stuff are smart. They know you want the best for your child, and they aren’t above pulling on your heart strings to let you think that you “need this to be a good, loving parent.”

We did get the diaper genie and are glad we did. We never got the bottle warmer, and never missed it for a second. We got a pee tent (when you’re changing your son’s diaper and keeping him from peeing everywhere between diapers) and never used them. We got three strollers with our first—a regular that the car seat fits into, a jogger, and an umbrella stroller—and used all three but we never have really used the tandem stroller once Mini Fox joined his brother. There are a million more examples but you get my point.

This isn’t a baby blog, so I’ll stop there. Just understand my point is that you can spend hundreds and thousands and tens of thousands of dollars on baby stuff, much of which you won’t need and none of which will make you love your baby any more.

2. Start a 529 account. If you are planning on paying for some or all of your child’s education (that’s a big “if” and one I covered here), a 529 is a no-brainer. Basically, a 529 allows you to take after-tax money and invest it for your kid’s education. That money can grow tax free so when you take it out you won’t pay any taxes on it. In that way it’s very similar to a Roth IRA.

Doing back of the envelop math, if you saved $500 per month for your child’s education that would give you about $200,000 after 18 years. Of that $200k, about $110k would be what you put in and $90k would be what you gained on your investments. Without a 529 you would be taxed on that $90k gain; depending on your tax bracket that could be $30-40k you would owe Uncle Sam. With a 529 you get to keep that. Think about that for a second—basically the tax advantages of a 529 buy you another year of college. It’s like buy three years, get the fourth year for free.

1. Love. This is a finance and investing blog so I always focus on money, but with your baby your love is a million times more important than anything you can do that has a dollar sign attached to it. There will be some costs, a few of which we discussed above, but not as many as you’d think. You’ll spend some on diapers and formula, as much or as little on clothes as your fashion sense (or lack thereof) allows, and you’re pretty much set.

Very often, somewhat to your chagrin, they’ll find more joy in the box that expensive toy comes in than the toy itself. Library books are free, and children’s books in general are pretty inexpensive, so reading to your kids (one of the best things you can do according to child development experts) is pretty cheap and really rewarding. And walks to the park and rides on the swings are still free. As is keeping your cool when your kid puts one of his rubber balls under the treadmill, having it sucked into the motor so now it makes a funny noise.

As you embark on parenthood it’s a crazy rollercoaster. Sure there are a couple financial bows you have to tie, but I don’t believe near as many as a lot of people would have you believe.

Happy parenting. For those parents out there, what were the major financial items you had to take care of when your bundle of joy arrived?

Getting a mortgage when you could buy the house outright

November 2, 2015November 1, 2015 Stocky Leave a comment

As you know, Foxy Lady, the two little cubs, and I relocated from Los Angeles to North Carolina. Obviously there were a ton of changes for us, including selling our house in LA and buying a new one in Greensboro. As I mentioned before, property values in LA are absurd, so we were able to cash out of our old house and had more than enough money to buy our new Greensboro house outright. Yet that’s not what we did. We ended up taking out a 5-year adjustable rate mortgage with an interest rate of 2.25% on our new house. Let me tell you why:

Super low rates

Right now interest rates are at historic lows. A 30-year US bond has an interest rate of about 3% and a 1-year bond returns about 0.5%. Because interest rates are so low, that seeps into other areas like mortgages. Today you can get a 30-year fixed mortgage for about 4%.

Just to put that in perspective, when I bought my first condo in Chicago in 2007 mortgage rates were 6% and everyone was saying how crazy low they were then. Uncle Fox (UF for short) was telling me that when he bought his first house in the 1970s his mortgage rate of 9-10%. That’s crazy high. Just 1% can mean hundreds of dollars per month in savings on interest (obviously depending on the size of your mortgage).

You know how financial nerds reminisce about the heady stock market days of the 1980s and 1990s, or tell cautionary tales about the crazy interest rates and inflation of the 1970s (okay, maybe you aren’t a finance nerd, but I am)? I think 20 or 30 years from now we’ll be old folks who will be waxing on to the youngsters about when mortgages were so cheap, maybe the way your grandparents talk about a gallon of milk costing a quarter and a movie costing a dime.

We even doubled-down on this by getting a 5-year adjustable mortgage. We could have gone with a vanilla 30-year fixed with an interest rate of 4%. Instead we went with an ARM and that pushed down the rate to about 3%. That 1% decrease translated to about $350 in savings per month. Of course, we run the risk that after five years interest rates will rise, but remember that we have the money to pay off the mortgage, so if things start to go haywire we can just kill the mortgage and be no worse for wear.

Good time to be an investor

Seriously, I think now rates are so low that you’d almost be silly not to take out a loan. Of course, if you borrow the money and then just stuff it in a mattress you’re not really helping yourself. We are taking the money we’re getting from our California house that we could have used to buy our Greensboro house outright and investing it in the stock market.

Sure there’s a chance that the stock market could go down, but remember that mortgages have 30-year time horizons. Right now is a pretty crazy time for the stock market, but history tells me that over a long period of time, the stock market does really well. So if I can borrow money at 2-3% and invest it at 6-8% over 30 years, that’s a sweet little score for the ole nestegg.

Of course, nothing in life is guaranteed, but Foxy Lady and I are willing to play the odds on this one.

Company relocation

Not everyone will be so lucky, but for us we were able to take advantage of a pretty awesome benefit from Foxy Lady’s job that her company gave as part of her relocation. When they moved us out from LA to Greensboro part of the package was to “buy two points” for our mortgage.

Basically that means that they would pay 2% of our mortgage (about $8000) and get us a lower rate. That allowed us to get our 5-year ARM which normally would have been about 3% interest, and we got it for 2.25%. That 0.75% lower rate translates to another $300 or so a month in savings. That’s a lot of money over time, yet if we didn’t take a mortgage and just bought the house outright, we would have foregone that pretty sweet benefit.

That’s our story. As we were going through this process, the decision to get a mortgage or just go mortgage-free was something Foxy Lady and I discussed for hours. Paying off your mortgage “seems” like a good thing and a goal we should be shooting for. I totally get it. When you start a mortgage it’s like starting a marathon, and after years of hard work you cross the finish line and pay that sucker off.

Because we were really lucky with our LA home we had the chance to achieve that dream early. It seems like a good thing to do. But as is so often the case with investing, your head and your heart don’t always agree, and if you can stomach it, it’s usually better to go with your head. Interest rates are so low right now, plus we were very fortunate to have a bit of a turbo boost with Foxy’s new company buying points for us, that the “cost” of the mortgage was just crazy low.

Many years from now we’ll know the answer. Did we do better investing that money in the stock market, or should we have just paid off our house? Who knows, but my head always tells me to bet on the stock market.