Investing’s sucker bets—Mortgage insurance


As you know Foxy Lady and I recently bought a house, which means we recently got a new mortgage.  If you’re anything like us, your mailbox get bombarded with offers to sell you mortgage insurance.  On the surface it seems like a good idea: if you passed away then your mortgage would be paid off.  Who would argue with that?  Well, that’s where Stocky will, as a public service, show you how these are terrible uses of your money.


Deceptive marketing

First, I want to point out that the fine people at Symmetry Financial Group are guilty, in my humble opinion, of some pretty shady marketing practices.  They make this form look like it’s some type of registration with local government or something.  Even at the top they put “second notice”, seeming to say “hey buddy, you ignored filling this out the first time and it’s really important that you do it.”

If you’ve had a mortgage before, you know there’s a ton of paperwork, much of it you don’t read and don’t really understand.  Also, there’s a ton of stuff that needs to be registered with the state, city, county, etc.  They folks are preying on those fears that you think this is something you need to do; need as in required by law or you’ll get fined or something like that.

Anyway, whatever.  I’ll get off my soap box.  I know people are doing their best to sell stuff, but the way they present this seems shady to me.


How it works

There is no way I would ever buy mortgage insurance, but for the purposes of this blog, I called them up to learn more.  I was able to speak to Audrey, a very nice lady by the way.

We had (notice the tense of that verb, it will become very important in a little bit) a mortgage where we owed $417,000.  This mortgage insurance will completely pay off our mortgage if either Foxy Lady or I pass away.  Of course nothing is free in this world, so we are offered that peace of mind for the low, low price of $106 per month.

That’s the basics, but there are a couple wrinkles.  We could get the coverage just for Foxy Lady (since she’s the rodent-winner) or just for me (since I’m the cubs’ primary care giver).  That monthly price goes down if you just want to cover one home owner instead of both.


Why it’s not worth it

We’ve talked about life insurance before, and this is really just another type of it.  But when you start to look under the hood of this type, you see that it’s a really, REALLY bad deal.  Listed in order of badness, here are the reasons I think mortgage insurance is a sucker’s investment:

  1. It’s really expensive—Foxy Lady and I each have insurance policies that cost us about $50 per month and would pay out $1.5 million if either one of us died. This policy costs $106 per month and would pay out a maximum of $417,000 if either one of us died.
  2. Double dipping—At our ages, the most likely cause of death for Foxy Lady or me is an accident. Given that, there’s a fairly good chance that both of us would perish in the same accident—we drive together a lot, vacation together, sleep in the same bed, etc.  If we both died our life insurance would pay both our policies, but with mortgage insurance if both of us die, they only pay the mortgage, not twice the mortgage.
  3. Dissolving payout—The policy is meant to pay off your mortgage. When we first got our mortgage it was $417,000.  Today it is $412,900.  A year from now it will be $403,700, and ten years from now it will be $290,500.  So this policy is set up to pay you less with each month that passes.  Maybe today you look at it and say, maybe $106 a month is worth a $417,000 life insurance policy.  But every month that payout gets less and less.
  4. Perverse incentives—Somewhat related to #3, if you are so disposed to want to pay off your mortgage faster (this is something I don’t recommend, but there’s some deep water here which can be the topic of a whole other post), you’re actively diminishing the value of the mortgage insurance. Sure, the fine people at Symmetry Financial Group love this because if you do pass away the amount they give your loved ones is less.


So there you have it.  Whenever I get these in the mail I instantly round-file them (unless I need to take a picture for a column).  I just think they’ll a really bad deal.  If you are concerned about what would happen to your loved ones in the event you die, which can be very valid, get normal life insurance.  You’ll get much more bang for your buck.

Quit the LPGA for the sake of gender equality (and uber-compelling sports)

Nelson Mandela once said that sports “laughs in the face of all forms of discrimination.”  And he’s absolutely right.  Sports is an incredibly democratizing force that has the power to break down bigoted barriers.

Jesse Owens showed black men were just as good as any man.  In 1936 he outran Adolf Hilter’s eugenics athletes at the Berlin Olympics.  Greg Louganis showed that gay men could compete and win in athletics just as well as straight men.  In the 1984 and 1988 Olympics be dominated the diving competitions, bringing home 4 gold medals.  In 1954 the boy’s basketball team from Milan High, the team on which the movie Hoosiers was based, showed that a bunch of farm boys from a tiny speck of a town could outplay any other team in the state of Indiana.


We’ve come a long way, but not that far for women

Women’s sports have made tremendous strides in the past several decades.  The US Women’s soccer team captivated the nation over the summer, bringing home their third championship.  The WNBA will celebrate its 20th anniversary next year.  Women’s tennis is as popular as ever, and Serena Williams won “Athlete of the Year”.  Title IX, passed in 1972, has expanded female collegiate athletics by orders of magnitude.

Yet for all that progress, women’s sports as a spectator sport has lagged woefully behind their male counterparts.  Sure there are some bright spots like tennis and soccer and more recently MMA thanks to Ronda Rousey, but when evaluated by virtually any metric of popularity, women’s sports is SUBSTANTIALLY behind men’s.  There are fewer women professional athletes, their games/tournaments/matches draw much smaller crowds, people aren’t willing to pay as much to see them, they have lower television ratings, they get less ESPN coverage, they have much lower name recognition which leads to much smaller endorsement deals, and because of all of this they earn much, much less money.

I don’t believe these issues are related in any way to concerns about equal pay for women in the broader economy (actually I think that $0.79 study has serious flaws in it, but that’s for another day).  Sports is probably the most capitalistic industry.  Athletes get paid what they are worth or, thanks to free agency, they play for someone else.  Fans watch sporting events that are exciting to them, and they don’t watch those that aren’t.

So why aren’t women’s sports more popular?  Because it’s an inferior product.  Women’s sports just aren’t as good as men’s.  I’m not trying to be sexist, although I can certainly understand why it might come across that way at first, but please read on and you’ll see my logic.  Some may argue that they’re different and you can’t really compare them, like apples and oranges.  And there’s some truth to that.  But fans vote with their feet and their wallet, and they are voting that men’s sports are better.


Exclusionary sports = less entertaining sports

On the surface it’s easy to look at this and blame misogyny.  After all, most sports fans are men, although it’s not skewed nearly as much as you’d think.  For example attendance at NFL games is about 56% men, 44% women.

The answer lies in the exclusionary nature of women’s sports.  By definition, women’s sports only allow women to compete, excluding men.  Men’s sports on the other hand aren’t really men’s sports as much as anyone who can compete.  To play in the WNBA you have to be really good at basketball AND have XX chromosomes.  To compete in the NBA you have to be really good at basketball, and that’s it (you’ll notice there is no “M” in the NBA).  As I once explained to my wife in an extremely crude manner, “it doesn’t matter if you have one dick, two dicks, or no dick.”

Which league has the better, more entertaining, more popular product?  Obviously the NBA.  And it’s because most of the best basketball players in the world are men; the NBA allows those players to compete in their league while the WNBA does not.

And this isn’t just a woman thing.  Compare the Olympics to its cousins who exclude competitors based on some criteria.  The Olympics is far more popular than the Special Olympics (excludes competitors without disabilities), the Gay Games (excludes heterosexual competitors), the Senior Olympics (excludes younger competitors), the Junior Olympics (excludes older competitors), and any other that I may have missed.  It’s not even close.

Of course that’s not to say that women’s sport or those other exclusionary sports aren’t worthwhile.  THEY ABSOLUTELY ARE.  If women had to compete against men, most probably couldn’t, so I’m glad there are women’s (and more importantly girl’s) leagues.  Blind people or those with Down’s syndrome or paraplegics couldn’t compete against non-handicapped people in most sports, so I’m glad there is the Special Olympics.  The Gay Games seems as much a get together for like-minded people as it is a sporting competition so I’m glad it can serve that purpose.

But that doesn’t mean I’m willing to vote for them with my feet or wallet.  I’m a huge sports fan and I watch the sports that are entertaining and compelling.  Sometimes it’s women’s ice skating or gymnastics during the Olympics, last summer it was Serena’s run for the Grand Slam, and of course I watched the Americans win the women’s World Cup.  But mostly (roughly in order of importance to me) it’s men’s basketball, football, baseball, and soccer.  And I’m not alone.  All those metrics I mentioned earlier show that most men AND MOST WOMEN agree with me.

There’s a simple formula here.  If you want to produce the best, most popular sports product, you have the best athletes.  Not the best female athletes or the best male athletes.  Not the best old athletes or the best young athletes.  Not the best black athletes or white athletes.  THE BEST ATHLETES.


Playing with the boys

Quick, name the most famous race car driver you can.  Maybe you said Jeff Gordon.  He’s pretty good.  He won the NASCAR championship four times and 93 races over his career.  Maybe you’re old school and you said Dale Earnhart (won 7 season championships, 76 races) or Richard Petty (7 season championships, 200 races).  Maybe you’re new school and you said Jimmy Johnson (6 season championships, 75 races).

You know who a lot of people say: Danica Patrick.  She’s probably one of the most popular racers out there.  Is it because she’s won so much?  No, she hasn’t won a single NASCAR race.  Is it because she’s pretty?  Maybe, but there are a lot of pretty women out there, many much prettier than Danica.

She’s so popular because she is a woman competing against men.  If she was racing in a female only circuit, no one would care.  She wouldn’t do GoDaddy and Secret commercials, for which she makes about $10 million per year, among the highest of any NASCAR driver.  But she refuses to race against inferior competition because of her gender, and the public loves her for it.

Remember Tom Watson’s second place finish in the 2009 US Open?  There has been a lot of guys who finished second place in golf tournaments, but why do we remember this one with Tom?  Because he was a 59 year old guy competing against golfers in their 20s and 30s, and he nearly beat them.  Sure, there’s a golf tour for old guys, it’s called the Senior PGA and its ratings suck.    Watson could have dominated that the Senior PGA, but he decided to compete against the best without any qualification and the golfing community loved him for it.

Does the name Jim Abbott ring a bell?  He was a major league pitcher who had a record of 87-108.  That’s not really all that good, but why do we remember Jim?  He did that with one freaking hand; he was born without a right hand.  Sure he could have been the all-time greatest pitcher at the Special Olympics, probably pitching perfect games every time, striking out every batter he faced.  But no, he decided to compete against the best baseball players in the world, and he won.  Opposing teams even tried to bunt against him, figuring he couldn’t field the balls because of his missing hand.  He took on that challenge too, having a fielding percentage commensurate with his fellow pitchers, all of whom had two hands.

Here are examples of athletes who could have competed against inferior competition because of their gender or age or disability.  But all of them refused to be held back, and they competed against the best athletes in the world at the highest level.  And for that the sporting public loved them more, gave them more money and more ESPN coverage, and came out to see them in greater numbers than their performance alone probably merited.


Women’s sports are holding female athletes back

So let’s bring this full circle.  Women’s athletics.  Physiologically, men are stronger and faster than women.  Because of that it would be nearly impossible for even the most gifted female athlete to compete against men in sports like basketball or baseball or MMA or swimming or track and field.  Even the all-time great Serena Williams would probably lose in the first round of the men’s bracket (although it would be entertaining as hell to see—more on this in a second).  The US women’s soccer team would almost certainly lose three games in a row, probably not even scoring a goal, if they competed in the World Cup.

But there is an extremely popular sport where I think women can compete against men—golf.  Right now there is a tour that features the best golfers in the world, the PGA, and there is a tour that features the best players in the world but excludes men, the LPGA.  As you would imagine, the PGA is much more popular, covered on ESPN much more extensively, pays its winners much larger purses (about twice as much), produces much bigger stars, and on and on.

Every once in a while, a brave female golfer decides not to be held back by her gender and competes in the PGA.  Everyone loves it—Presidents mention it, the media goes bonkers, and that woman golfer starts trending on Twitter in a major way.  Unfortunately, it happens very rarely, about once every few years.  Anika Sorestan did it in 2003 and Michele We did it a few times between 2004 and 2008, and that’s about it.  Sadly, most women compete in the LPGA in anonymity for lower pay with smaller crowds and less coverage.

Why don’t more women compete against the boys?  The common refrain is that women aren’t as strong as men (fact), and can’t hit the ball as far (possibly fact), so they can’t compete (fiction).  So long as female golfers continue to buy into this self-defeating paradigm, they’re missing out on gold and glory the likes of which no female athlete has ever seen.


Why women can compete against men in golf

Really the whole thing comes down to drives off the tee.  There’s no real reason women can’t putt as well as men.  That involves the ability to read a green, hand-eye coordination, and a deft touch.  Strength is not a factor.  Women’s abilities there are certainly equal to those of men.

The middle game, between the drive and green, can involve hitting the ball a long way, but club choice can probably address that.  Maybe a stronger, male golfer would use a 7 iron when 170 yards from the pin, so a weaker, female golfer would use a 5 iron.  Problem solved.

So let’s get back to the driver.  As you would expect, male golfers hit the ball longer with a driver than female golfers do.  Dustin Johnson averages the longest drives on the PGA tour at about 319 yards, while Joanna Klatten averages the longest drives on the LPGA tour at about 274 yards.  That’s a difference of about 45 yards.  Interestingly, that 45 yard difference tends to be consistent.  The difference between the average drive length for PGA golfers and LPGA golfers is about 41 yards.  The difference between the best golfers, Jordan Speith for the PGA and Inbee Park for the LPGA, is 43 yards.  The difference between the golfers with the shortest average drives, David Thoms in the PGA and Lisa McCloskey in the LPGA, is 45 yards.  So it seems there’s something to that 45ish yard distance.

Longest driver Dustin Johnson—319 Joanna Klatten—274
Average driver 290 249
Shortest driver David Thoms—270 Lisa McCloskey—225
#1 player Jordan Speith—292 (ranked 77th) Inbee Park—249 (ranked 78th)


Now an extra 40 yards on each hole is a big deal.  It might seem like a pretty insurmountable advantage for the male golfers, but a closer look shows a few different reasons why maybe it isn’t that big of a deal after all.  First point, golfers don’t use their driver on every hole.  Certainly, they don’t use it on the four par 3s typically found on each course.  Additionally, there are shorter par 4s where the male golfers tee off with a three-wood or an iron, because they don’t need to get maximum distance.  Finally, courses may be designed to limit the advantage of a long drive.  Doglegs are a common feature on holes which force golfers to hit shorter shots off the tee so they can make the turn when the dogleg bends.  Ponds and streams have a similar effect.  All those are examples of how hitting longer balls doesn’t necessarily mean playing better.

Second point, no one knows how far women can drive a golf ball.  Just as noted above, men aren’t always hitting the ball their hardest with their biggest club because of the course features, there’s no reason to think the same doesn’t apply to women.  LPGA courses are set up to be shorter than PGA courses.  If women are teeing off closer to the green than men, it shouldn’t be surprising that they don’t hit the ball as far.  Taking the 2015 US Open and Women’s US Open as examples, the men’s (although it’s not really right to call it “men’s” since women are able to compete in the US Open as well) course at Chambers Bay in Washington was 7384 yards long while the women’s course at Lancaster Country Club in Pennsylvania was 6483 yards.  That’s a difference of 901 yards for 18 holes.  Do some easy math and what is that difference on a per-hole basis?  Wait for it . . . . 50 yards.  Hmmmmm.  Women drive about 45 yards shorter than men do, but they play on courses whose holes are about 50 yards closer.

Third point, faster, harder swings aren’t the dominant factor in successful drives.  Golf club technology has made amazing strides forward.  Sure you still have to swing the club, but weaker individuals can hit balls further thanks to titanium drivers, carbon-fiber shafts, and all the other stuff in clubs today.  Driving is more a matter of hitting the ball in the sweet spot and with the proper back swing, than it is swinging hard.  If swinging hard was more important you’d see golfers with thick arms and butts who can really generate some serious club speed due to their strength.  As it is, most golfer have thin body frames.

Final point, just because you drive long doesn’t mean you win.  Look at the #1 golfers on the PGA and LPGA tours.  Jordan Speith is the #1 golfer on the PGA, but he has the 77th longest drive on the tour, 27 yards shorter than the longest driver.  Inbee Park is the #1 golfer on the LPGA, but she has the 78th longest drive on tour, 25 yards shorter than the longest driver.  Those numbers are eerily similar.  Of course the reason is that the other components of the game, that have nothing to do with strength, allow these golfers to succeed.  It’s commonly acknowledged that Speith is the best putter on the tour, and he leverages that to win more than anyone else.


For gold and glory

Let’s put a bow on this package.  It’s not true in a lot of sports, but in golf women can compete against men and they can win.  THEY CAN WIN.

Why do professional athletes compete?  For fame, for immortality, to beat others, to prove they’re the best, for money?  All those become bigger and better for a female golfer who competes in the PGA.  And not just a little bit better.  Orders of magnitude better.

What’s the most famous tennis match ever?  Billie Jean King versus Bobby Riggs in 1973.  It was dubbed the “Battle of the Sexes”.  It was played in the Houston Astrodome in front of over 30,000 fans (attendance at the US Open championship for tennis is usually about 24,000).  It was carried live television and seen by millions.  And competitively it was a farce.  King won, “proving” a woman could compete and win against a man, buuuuuuut King was in her prime at age 30 (Serena was 34 when she won three grand slams) and Riggs was 55.  King didn’t prove that a woman could beat a man as much as she proved a younger person could beat an older person.  Even so, it was an enormous deal that captivated the nation and which people still talk about nearly 50 years later.

Can you imagine if a cadre of the world’s best women golfers decided to do the same thing?  We’ve seen it already just in small doses, but what if it became a real thing where women seriously competed against men, not just as a one-week lark but as a legitimate member of the tour?  The internet would explode, Twitter would blow up.  Instantly, they would be on every late-night talk show, they would get top-billing on ESPN, they would have more endorsement deals than they would know what to do with, they would get White House invites, they would have throngs of fans at the events.

And if they won?!?!?!  That wouldn’t be the biggest sports story of the year, it would be the biggest story of the year or maybe even the decade (if there wasn’t a major war).  She would instantly win “Athlete of the Year”, a Congressional medal of honor, and probably a Nobel Peace Prize.  Seriously, what event would have a bigger impact on gender equality that a woman showing she could beat the men on the field of play?

It would put a sword through the heart of the argument, currently a very valid one, that women’s sports are inferior to men.  It would inspire millions of girls (and boys too) to take on the biggest challenges and know you can come out the winner if you work hard enough despite your vagina.

It could do all those things and it’s so achievable.  Will it be easy?  No, such things rarely are.  Will it force the best golfers on the LPGA to eat a little humble pie as they go from being dominant among inferior competition to fighting it out against the world’s best?  Yes, absolutely yes.  But if those LPGA golfers are doing it for money or fame or importance, all those things wait for them by taking on the men.  Only that money and fame and importance are hundreds of times bigger than the best they can hope to achieve now.

I don’t know if it will happen, but as a sports fan and as an advocate for gender equality, I sure hope so.

Top 5: Investing lessons from Madoff scandal


A few weeks back, ABC did a two-part miniseries on the Bernie Madoff scandal.  It speaks to how busy two little cubs can keep a fox that it took me that long to watch the show on DVR.  Ahhhh, parenthood.

Here’s a quick primer for those not familiar with Madoff:  He ran a hedge fund which turned out to be a $50 billion pyramid scheme.  He’d take people’s money, say he was investing it, give them statements showing awesome returns, but all the while he just kept the money in his bank account.  When the Great Recession hit and everyone wanted to take their money out of the market, his investors went to get their money and Madoff finally confessed that he perpetrated probably the largest financial fraud ever, in any country in any era.

Overall, I enjoyed the miniseries, but I’m really into personal finance so that shouldn’t be too surprising.  Obviously Madoff is a cautionary tale of fraud and cheating, and how you as an investor should avoid those things.  No kidding, right?  You might as well say not to drive on the day you’re going to have an accident.

But investing fraud still happens, all the time, every day.  What are the lessons you can take from the Madoff case that can help you avoid being ripped off.


Top 5 lessons from Madoff

5. Remember that you’re the boss: One of the major reasons that the Madoff fraud was able to go on for so long is that no one ever took their money out.  It’s not that the investors didn’t want to get the money every once in a while, but when they went to make a withdrawal, they were told that if they took their money out they wouldn’t be able to reinvest it at a later time.

That implied threat is a little bullsh*t.  It’s like a kid saying if you disagree with him, he’ll never be your friend again.  It’s your money and the investment advisor is working for you, not the other way around.  Any time you want to do something with your money and you’re told “no” that’s a massive warning sign.  Now maybe you want to do something that doesn’t make sense (like cash out your 401k), and there it’s appropriate for your advisor to help you make a good decision.  But it is your decision and once you’ve made it, your advisor should support that decision 100%.  If it is anything less, you should run the other way.


4. Keep it simple, stupid: Madoff claimed that he was using a very complex investing strategy that involved options and other really complex derivatives.   It had a lot to do with investing in equities and then doing short covering with by selling calls or buying puts.  Confused yet?  That’s a bit of the point.

Had Madoff actually been doing what he said he was doing, it was an incredibly complex strategy that very few regular investors would understand.  Hopefully one of the things we learn from this column is that investing is simple.  Doing things like investing in index mutual funds to minimize cost and maximize diversification aren’t that complex.  Neither is taking advantage of the tax benefits of 401k’s or 529s or IRAs.

Actually, my experience, and something you have heard me say countless times on this blog, is that when you go away from simplicity and start to get into complex investments that’s when everything goes to hell.  The fact that Madoff used that complexity to facilitate his fraud is just another reason to keep things simple.


3. If it’s too good to be true, it probably is:  Somewhat related to #4 is the age old wisdom that if it seems too good to be true, it probably is.  What made Madoff’s investments so appealing is that he consistently had returns in the 10-12% range year after year, in good years and bad years.  Of course we know that in investing there is a fundamental tradeoff between risk and reward.  The fact that Madoff was producing high returns with very little risk (variability in those returns) should have been a major red flag to investors.  You never want to look a gift horse in the mouth, but you also don’t want to keep your head in the sand.

And actually many of Madoff’s investors knew something was fishy.  They just thought he was “front running.”  That’s an illegal practice where he would know the orders that others were placing and then invest right in front of those.  Think of it this way: if you know there is going to be a major order to buy Coca-Cola stock, you could decide to buy Coca-Cola just before the big order hits.  When that big order does hit, it will likely increase the stock price, and you benefit from that rise.  It’s totally illegal, but it’s also a great way to do really well in the stock market.

This is a bit of a sad commentary.  Madoff’s investors were fine when they thought he was cheating and they were benefitting from it.  But if you play with fire you get burned.  They were right that Madoff was cheating but it turned out they were the victims.  Somewhat ironic.

Anyway, back to the moral.  If you know something is fishy, you need to figure it out.  Hopefully this blog has helped set expectations for you on the stock market—stocks average about 6-8% over long periods of time but there is a ton of volatility from year to year.  If someone is claiming to defy gravity, you really need to take a long, hard look at what’s going on and figure it out.  Which leads us to . . .


2. Understand what your investment advisor is doing: When people would ask Madoff how he got those consistent, high returns we mentioned in #3 he said he really couldn’t explain it because it was too complex #4.  So we’re seeing a few problems here.

However, people were fat, dumb, and happy (plus add greedy to that list), so they left well enough alone.  But that’s a major no-no.  Even if you have someone helping your with your investments, you should still know what’s going on with your money.  For your advisor to respond “it’s too complex; you wouldn’t understand it,” is just unacceptable.

I get that for some investment advisors there is a proprietary nature to their work and how they pick their investments.  Telling you gives away the secret sauce, and it’s understandable that they wouldn’t want to do that.  Of course, I totally disagree with that because I believe in efficient markets, but I can accept that other people see things differently.  That makes this a really sticky issue.  You really should understand what is going on with your investments.  If your person is unwilling or unable to explain that, then you should probably find someone else.


1. Do it yourself: This is a little bit of a snarkey comment, but there’s a lot of truth to it. Madoff stole from people for his own benefit.  You know the only person in the world who can’t steal from you for their own benefit?  YOU.

Of course, that’s not to say you shouldn’t trust others, but trust is a big word, and especially in investing there are a lot of unscrupulous people who are waiting to steal your money.  If you distilled this blog down to a central there, it would be that with investing you can do it yourself.  This isn’t rocket science, although some people try to make it more complex than it needs to be #4.  This can be simple stuff that over the long term is virtually guaranteed to make you money.


There you have it.  My Top 5 lessons from the Madoff scandal.  Investing is a critically important part of preparing for your future.  The path is lined with crooks and cheats, so beware.  But let’s not end on that pessimistic note.  You can do an amazing job investing for yourself and that can protect you from the frauds.  That’s better.

Buying an annuity—good idea or bad?


Pensions are one of those romantic notions from a bygone era, like doctor’s house calls or ice cream parlors.  Many from the older generation earned a pension with their job and receive a monthly payment that will last as long as they do.  Fewer from the younger generation have pensions, although a few still do, but that job benefit is disappearing as quickly as your local Barnes and Nobel store.

As pensions quickly disappear, being replaced by things like 401k and 403b accounts, many people in society wax nostalgic.  “Pensions are the really good benefit; that’s the one you want.”  But pensions haven’t gone extinct.  There is a thriving, enormous industry where you can buy a pension for yourself—ANNUITIES.

You can go to Met Life or Fidelity or one of a thousand other places and buy an annuity.  Basically, you give them a lump sum of cash and they give you a monthly check for the rest of your life.  So that $3000 per month pension that you wished your company gave you, you can buy that for about $540,000.


Are annuities a good deal?

So we know that we can buy an annuity which is basically like getting yourself a pension.  Now the question is—should you buy an annuity?  Are they a good deal?

This became somewhat relevant for the Fox family a few months ago when I left Medtronic.  As I mentioned there, I had to choose between getting a lump sum of cash or a pension.  I went through the calculus and determined that financially, given my age and other assets, that the lump sum probably would have been better, yet I went with the pension.  This was a bit of a head-versus-heart decision, and I went with my heart.

So how about you?  If you have a pile of cash that you’re planning to use for retirement, should you use that to buy a pension?  Let’s look at the numbers.  Luckily, in this day and age, you can find pretty much anything on the internet.  Annuity prices are no different.  I go to Fidelity’s website for this info, but you could just as easily go to a hundred other websites.

Today, I could take $100,000 of savings and buy an annuity that would pay me $386 per month, each month until I die.  Is that a good deal?  Probably not.

Think of it this way: I could take that $100,000 and invest it in the stock market, which I estimate returns 6% per year.  Then each month, I could withdraw $386 from the account.  After 52 years (when I turn 90 and pass away surfing a massive swell off the coast of Portugal) any guesses how much that account would have left in it?  Remember, after I die the annuity would be worth nothing.  But my account would be worth . . . $500,000.

This is me just taking some crazy big wave to school and showing it who is boss (no, that’s not really me but I wish it was)

What?  Wait!  How is that possible?  I could go into the math, but the short answer is that with that annuity, Fidelity is “paying” me about a 4.2% return on that $100,000 I gave them.  If I can get 6% by investing it in the stock market, knowing it has its ups and downs but on average comes in at 6%, then I will come out well ahead.  Conversely, if I got less than 4% by investing in the stock market, I would come out behind.

So the question you need to ask yourself is what kind of return you think you can reasonably get from the stock market over your entire lifetime.  Fortunately for you, we have looked at historic returns and you can get a sense of the likelihood of being able to beat that 4% bogey.  At least based on historic returns, this is a no-brainer.  The likelihood is very high that you’re better of investing your money in the stock market and foregoing an annuity.

But . . .


What would make annuities a good deal?

. . . the annuity industry is huge and a ton of people buy them.  Is it all a rip-off?  Are they all stupid?

When I first started writing this column I was prepared to say “yes” to those questions.  But I have given it more thought and I’m prepared to offer a solid “maybe”.  As with all investments, it depends on your situation.  For annuities, it mostly depends on your age.

As a 38-year-old Stocky, I think they’re a terrible choice.  I am SUPER-confident that I can do better than 4.2%.  Also there are a lot of unknowns out there with regard to inflation, life, my financial situation, my personal health, etc., that make me really reluctant to lock up my money in an annuity.  Even as a 50 or 60-year-old fox I’d probably pass.

But as my tail turns from red to gray, I think pensions start to make a lot more sense.  Remember, as a 38-year-old, my $100,000 would be worth a $386 monthly pension.  As a 70-year-old, my $100,000 would be worth a $646 monthly pension.  If I think I’ll live to 90 and then die in my surfing accident, that implies a 6% return, quite a bit better than the 4.2% when I was 38 years old.

Also, a lot of those unknowns that kept me from wanting to buy an annuity when I was 38 are a lot less important when I’m 70.  I’ll have a pretty good idea of the state of my health (the worse your health, the worse an annuity is as an investment).  I’ll have a time horizon of closer to 10 or 20 years which definitely means that I should be pulling back the investment risk I want to take.  I’ll have a sense of the direction inflation is going.

For all these reasons, I can imagine when I am a geriatric fox that buying an annuity would be a good choice.  As a 38-year-old, it’s a terrible choice.

So that’s all well and good when you’re a septuagenarian, but what about when you’re younger.  After all, Stocky, you did opt for a pension when you left Medtronic.  That’s a good point and if you’re young I think the way you need to look at pensions as a bit of a bond, with an expected return in the 4% range.  We all know from asset allocation that you should have a mix of stocks and bonds, more heavily weighted to stocks when you’re younger and then slowly moving to bonds as you age.

For me and the decision on the Medtronic pension, this was the reason.  The Fox family’s portfolio is very heavily weighted to stocks, and at our age that seems appropriate.  But the pension was a way to get a little bit of a “bond” in there, so that’s what we did.  So there you go, if you’re younger really the only reason that buying an annuity would make sense is if you wanted to tone down the risk from stocks.

The pluses and minuses of college sports

Normally I write about personal finance and the stock market.  However, due in some part to the fact that I have a lot of free time since I don’t have a real job, I was thinking about posts on the weekends that look at other parts of society that interest me.  I’m a huge sports fan, so let’s take a Stocky-Fox look at college football and men’s college basketball.



College sports has a hallowed place in American culture.  Wait a second, let’s be honest with ourselves, really two college sports have a hallowed place in American culture—football and men’s basketball.  ALL the others fall significantly short when you look at basic metrics to gauge popularity and importance—the revenue they generate, the fans that attend the events, the coverage they get on ESPN, the Facebook posts/Tweets they get, etc.  I am willing to concede that in certain geographies men’s hockey, men’s baseball, and women’s basketball are quite popular, but even then they tend to be small potatoes compared to football and men’s basketball.  So for the sake of this post, let’s focus on the two biggies.  Unless I say otherwise, when I refer to college sports in this post, I am specifically meaning football and men’s basketball.

I am a huge college sports fan, but I am also extremely conflicted.  Some of my fondest memories growing up with my dad revolved around college sports—picking our basketball brackets, watching New Year’s Day bowl games on TV, going to University of Redlands basketball games, to name a few.

But the state of college sports is shameful, and has always been.  Just recently the University of Louisville, bear in mind I went to high school in Louisville, just put its men’s basketball team on probation because of a scandal involving prostitutes and recruits.  A couple years back the University of North Carolina, bear in mind I just moved to North Carolina, got in hot water for a pretty extensive academic fraud where the basketball players weren’t going to class.  A few years before that USC’s football team had to vacate their Heisman trophy and national championship because of allegations of paying players, bear in mind we just moved from Los Angeles.  And there’s a million others—sexual assaults, point shaving, physical assault, drug abuse, steroid use, and on and on and on.  Year after year after year.  Are these the types of institutions and people our society should place on pedestals?  If I am watching them play, aren’t I complicit in that pedestalization?

I want to take this post to objectively look at the pros and cons of big-time college sports.  As you read this, I would love to hear what you think.


What is the role of higher education?

First and foremost, we need to decide what we want colleges and universities to do.  Is it to educate students in subjects like math, science, history, and literature?  Teach life skills? Prepare them for gainful employment?  Expose them to a diverse world?  Offer an opportunity to explore their interests?  Provide really fun times?

For non-athletes, the only one of those that sports at their school meets is the “provide really fun times”.  Let that sink in for a second.  College sports, which is a huge deal across the country, benefits the vast majority of students by providing “fun”.  For all the time and effort and money that surrounds the issue we’re talking about, that’s the benefit to most.  That doesn’t really seem to align with the mission of higher education, but maybe it should.  More on this a bit later.

For athletes it’s a bit more complex.  College sports has nothing to do with educational subjects.  Nor does it have to do with exploring interests; only in the rarest of circumstances does a guy go to college and say “let’s try basketball out.  I always wanted to do that.”

For a very, VERY small fraction of athletes it does prepare them for gainful employment in a professional football or basketball league.  However, you could also argue that too many college athletes who don’t have the skills to be professional athletes might dedicate too much effort chasing that professional dream that will never materialize.  That said, let’s agree that for the best athletes, college is an important place to prepare for future employment, just like it is for non-athletes.

The big one in my opinion is the life skills piece.  Whether you go pro or sit the pine, being on a team offers great opportunities to grow and mature as a person.  Admirable qualities like dedication, commitment, teamwork, humility, pride, achievement, and many more are very available for any athlete who is open to accepting them.  But remember, only the athletes benefit from this, not the larger student body.

So there you go, when you look at the role of higher education and its intersection with college athletics, it really seems to boil down to the life skills that athletes are getting, with a small element of job training for the most gifted athletes.  And non-athletes get bupkis (except maybe some really good times).



Supporting all the other athletic programs

To the degree that you believe in that “life skills” argument for the athletes then you have to support college football and basketball.  Why?  It’s a simple answer—MONEY.

Those two programs (and football much more so than even men’s basketball) generate the money that pretty much supports every other sport.  Just as an example at the UofL, since they’re in the news, the two big programs generate a ton of money, about $2 million of which goes to the other athletic programs.

Other sports like gymnastics, swimming, volleyball, and on and on—none of those could exist without the largess from football and men’s basketball.  All of those are money losers.  What funds them?  You have two choices: either your football and men’s basketball programs, or you can pay for them by the general funds of the university.

So let’s say you’re fed up with football and men’s basketball because of all the crap.  You can shut down your athletic program, or you can pay for it by using funds that could otherwise go to student housing, scholarships, research, or (try not to laugh) lowering tuition.  How important is gymnastics or lacrosse or wrestling?


Women’s sports

I could have mentioned this in the “pay for other athletic programs” category, but women’s sports deserves its own section.  In 1972 Title IX was passed into law which basically equalized college sports for men and women.  It required that the same amount of money be spent on women’s sports as men’s, and that the same number of athletic scholarships be given to women as men.

This was a huge boon for women’s athletics, as you can imagine.  The number of sports that schools offered for women increased because they had to even out things with their men’s programs.  Football teams are allowed 85 scholarships, so that has to be matched by 85 scholarships for women’s programs.  Just using round numbers, that means the football program is balanced out by the women’s swimming, gymnastics, field hockey, soccer, and softball.  Not bad.

But let’s be honest with ourselves.  The only reason Title IX was possible was because football and men’s basketball were so profitable.  You can’t really tax those programs in a traditional sense, so really the only way that society could dictate where that money went was by forcing a “gender equality” gambit on them.  And by most standards it’s been a huge win.  Football and men’s basketball get to continue to do their thing and now there is a whole generation of women athletes who get to participate in collegiate athletics and get all those life-skill benefits it provides.

But make no mistake, without college football and basketball, women’s athletics are dead meat.


Students who wouldn’t otherwise be there

Football and men’s basketball is often a path to higher education for many students who would otherwise never be able to attend college.  The number of young men who parlayed their athletic abilities to get a higher education is countless.  And that’s important.  Undeniably college sports has taken men who would otherwise be blights on society and given them the opportunities to get an education and become contributing members of society.

This is especially true for poor students and black students (who statistically tend to be poorer).  There are a million examples, but a good one is Georgetown University.  It is an extremely highly-regarded, extremely expensive private school in Washington DC.  The total student body is about 6% black.

It also has one of the most storied men’s basketball program in the nation, thanks to the legendary coach John Thompson (who I think is best basketball TV analysts out there and I wish he would do more games).  The starters for the basketball program for the past several decades are probably about 90% black.  A student body that is 6% black with a basketball program that is 90% black.  How many of those black students would be going to Georgetown if it wasn’t for basketball?  Probably not many.

Of course that’s good for the students, but that’s also good for the university.  Isn’t college supposed to offer that type of exposure to diversity?  Probably a lot of that goes away if one of the main avenues for “different” types of students to attend the school goes away.


What really matters to college students?

If you’re a non-athlete student going to college, what are the things that are really important?  In a lot of ways college is a bit of a commodity.  The calculus you learn at UofL is the same I learned at Pitt.  Biology is the same, accounting, English literature, mechanical engineering, and on and on.  Sure, there might be slightly nuanced approaches to teaching the subjects.  And definitely the professors can make a huge difference, but every college has their share of good and bad teachers.  There are some schools that truly offer coursework that no other institution offers, but those tend to be the exception.

There’s the campus as well.  Is it idyllic like Centre College in the middle of nowhere in Kentucky?  That can be really nice and peaceful, allowing the student community to really forge strong bonds on their “academic island”.  Is it an urban campus like I had at Pitt, allowing us to embrace the city of Pittsburgh and all it had to offer?  Those are differences.

Also, there are the amenities on campus: the niceness of the student housing, the food court, workout facilities (probably funded by the athletic programs).

We haven’t mentioned fun yet.  When you’re a student what are you doing for fun?  Sure there’s a ton of things, much of which involves beer and bad decisions regarding sex.  One of the main sources of fun for a very large part of the student body is football and men’s basketball.  There’s tailgating, going to the game, celebrating the wins, and getting collectively pissed at the refs who robbed your team of the game in the loses.  Unquestionably, there are a lot of students who couldn’t care less, but there isn’t another school activity that brings more students together than college sports.


What really matters to alumni?

As important as college sports is to the students while in school, they become even more important to an even larger part of the alumni after they leave school.  Just look at the vernacular: “Homecoming”.  That is when alumni come back home, come back to campus.  And what is the centerpiece of “homecoming”—it’s a football game.

As a Pitt alumni I try to be involved in recruiting and mentoring, but it’s pretty hit or miss.  You want to know what connection I consistently have to Pitt—getting together with local alumni to watch the football games each Saturday (I did this in LA, but now that we’re in Greensboro, surprisingly, the Pitt network isn’t as strong).

I couldn’t tell you the number of Rhodes Scholars that Pitt had or the amazing patents their research institutions have filed.  I have no idea who the most influential lawyer or innovative entrepreneur or life-saving doctor is.  You want to know what I do know?  The football team had a decent season and lost to Navy in their bowl game.  The basketball team is middle of the pack in the ACC and will probably miss the tournament.  And that is going to be the same for 98% of the alumni out there.


Being entertaining as hell

College athletics can reasonably be seen as an entertainment product.  How many other things do you know that can pack a stadium with 100,000 people, have fans camp out for tickets, drive a huge Nielsen rating on television, and bring a local community together?  Not many.  So that’s a good thing.

People who are disdainful about sports because of all the bad apples are surely entertained by something.  If not sports then opera or theater or movies or concerts or something.  College athletics in many ways is just that, a really entertaining product.


Our entitlement society

Now we’re at the crux of the issue, all the bad behavior.  Prostitutes, skipping classes, drugs, alcohol, and all sorts of other bad things.  Of course, all those things are pretty common on college campuses, whether involving athletes or non-athletes.  The problem comes in with the difficult-to-wrap-your-arms-around idea that college students represent the school and should be held to a higher standard.  That’s a tough one to hold them up to a higher standard and punish them when they do the same things other students do.  A huge plank of the anti-college athletics argument is “fairness”.  Where is the fairness of holding college students to a higher standard?

When athletes do break the rules, there’s the perception that they get treated with more leniency than an ordinary student, and that is most certainly true.  But why should we be surprised?  That is society.  How many rock stars or actors or politicians act like absolute assholes but society turns a blind eye because they are famous?  Justin Bieber, Ted Kennedy, Hugh Grant, and on and on.

Why should it be different for a similarly talented person, but their talents are putting a ball through a hoop instead of writing a catchy tune?  Now the optimist will say we shouldn’t allow that all.  Every person should be held to the same rules.  I agree with you.  But we don’t live in that world.  Let’s be realistic.  That is a problem bigger than college athletics, that’s a problem with fame.

But it’s fair to say why should colleges tolerate these bad guys on their teams, knowing that these misbehaving athletes will be the face of the university.  The short answer: WINNING.  We live in an entitlement society and athletes enjoy those entitlements.  The better of an athlete you are, the more entitlements you receive.  And any economist will tell you that without repercussions for bad behavior, people will behave badly.  It’s that simple and that’s what’s happening with college athletics.

Sure, there are sterling examples of good athletes.  Grant Hill comes to mind as a superstar college athlete who was a genuinely good guy and didn’t get in trouble.  So does Peyton Manning . . . except that would have been true two weeks ago.  Now there are allegations that he sexually assaulted a female athletic trainer when he was at University of Tennessee.  Of course, you don’t have to go very far to find the athletes who are bad guys.


Can a college exist without sports?

So what’s a school to do?  We probably need to accept that in the foreseeable future if you want a winning college athletic program, you have to get athletes who have a certain amount of unsavoryness to them.  Suggesting otherwise is just putting your head in the sand.

Maybe some should follow the University of Chicago’s example (I went to UofC to get my MBA, incidentally).  Back in the 1930s and before Chicago was a sports powerhouse.  They were a founding member of the Big 10, won the first Heisman trophy, fielded a football program that competed against the Chicago Bears on the Midway (the Midway is a park on the UofC campus; ever wonder how the Bears got their nickname “Monsters of the Midway”?).

They gave it all up.  In 1939 they abolished their football program and in 1946 they left the Big 10.  As you might expect, their athletic program descended into obscurity.  They are now a Division III school.  Their football stadium and basketball areas seem like small high school facilities.  Why would a school give it all up?

They wanted to focus on academics.  Wait?!?!  What?!?!  A university wanted to focus on academics at the cost of their athletics program.  Hard as it may be to believe, it’s true.  Chicago is now widely considered one of the premier research universities in the world.  Their student body is one of the smartest.  It’s also one of the nerdiest and least fun.  There are t-shirts that boast “UofC: Where fun goes to die”.  And there’s a lot of truth to that.  There are no football bonfires, no big games that bring the school together, no championship banners, no alumni events centered on a great gridiron victory.

The choice is there.  A school can focus on academics and rid itself of the collateral damage that comes with it, that comes at a major cost.  Which schools are willing to do that?  To my knowledge, Chicago is the only school that deliberately destroyed such a strong athletic program for the sake of staying true to its academic mission.


What to do?  What to do?

If you look at all this, it’s a tough call.  Football and college basketball are fairly filthy, but a lot of good comes from that filth.  Support for all the other athletic programs, including women’s sports; greater diversity on campus; fun and a sense of university community; entertainment for the masses.  Do you give all that up, like the University of Chicago did, just to rid yourself of the filth?

My answer is “no”.  I hate that football and men’s basketball programs are so despicable and drive a double-standard.  But to me the good outweighs the bad.  Just like in society at large, you have to take the good with the bad, and college football and men’s college basketball are no exceptions.

Inflation Killers—Craig’s List


Over the past few years the Fox family has become big fans of Craigslist.  For those who don’t know, basically it’s like a classified section on line.  You can sell stuff you want to get rid of, or you can buy stuff that you would be okay purchasing used.

Thanks to this crazy invention called the internet, which seems to be at the root of many inflation killers, you can buy and sell used things with an experience about a million times better than just a few years ago, when everything was done with the classified section of your local news paper.

Craigslist allows you to describe your stuff in as much detail as you want.  Newspapers limited you to maybe 50 characters; on the internet you could write 50 sentences if you wanted.  Also, with Craigslist you could include as many pictures as you want; no such luck with a newspaper.  Plus, Craigslist has features that allow you to filter the results to get exactly what you want and see where you would pick up the stuff on an interactive map.  That’s a long of way of saying it’s so much better than the newspaper classifieds.

But who really cares about buying used stuff and how the classified section has entered the 21st century?  Well, a lot of people.  I don’t have exact figures, but Craigslist it’s one of the most heavily viewed sites on the internet, and because of it (again, no hard figures) it has substantially increased the “second-hand” economy.


If you’re a seller

If you’re interested in selling your stuff on Craigslist, the obvious advantage is that you’re taking stuff you don’t really use any more and you’re selling it for money (that’s pretty obvious, Stocky).  Maybe before Craigslist, you’d PAY the newspaper to list your stuff in their classified section, including all the time and effort that entailed.  A rather small audience would see the ad, plus there are all the limitations I mentioned before, and you might be able to sell it.  Or more likely, you’d avoid all that hassle and either throw it away or give it to the Goodwill.

Now there is a real market for the stuff you don’t want anymore.  You can pay $300 for that dresser, and after a few years, when you move or your tastes change, you can sell it.  My experience is that most things sell for about 50% off the cost of the product new.  So instead of that dresser costing you $300, it costs you about $150.

The Fox’s have sold a couple sofas and other odd bits of furniture, plus we sold a ton of stuff when we moved from California to North Carolina.  Maybe total over the past five years it’s added up to $500.  So that’s definitely not going to change our finances but it’s better than a stick in the eye.


If you’re a buyer

The obvious advantage of buying used products is you get them at a substantial discount.  Sure, it’s a little less convenient because you have to look around for what you want instead of going to a store knowing they’ll have it in stock, but decide how much that’s worth to you.  Plus, there is a whole class of people who enjoy searching for the stuff they want on Craigslist.  It’s like a Where’s Waldo for baby furniture.

Also, when you buy something used, it probably isn’t as good as if you bought it new, but that varies considerably with the type of product.  I would never buy anything electronic (computers, televisions, phones, etc.) used.  But I have no issue buying clothes, furniture, tools, toys, exercise equipment, and other stuff like that used.  For those, I can pretty easily and quickly evaluate if it’s any good or not just by looking at it.  And I find, similar to my feelings on generic products, the more I buy from Craigslist and have a good experience, the more different types of products I’m willing to buy.

This is where the Fox family has been much more active.  We bought our baby furniture, at least two futons, a refrigerator for Mimi Ocelot, lawn chairs, a 22-foot ladder, a mini basketball set for ‘Lil Fox, a fair number of tools, my bike and the kid trailer, my bowflex weight set, my little sailboat, and probably other things I can’t even remember now.  Let’s say that’s $8000 of stuff if we bought it new, and we probably paid less than $2000 for all of that.  Now we’re starting to talk about some serious money.

Lil’ Fox feeling the burn from our Bowflex that we got off Craigslist.


Double the pleasure, double the fun

You can even buy and then sell stuff on Craigslist, which substantially lowers your costs, possibly even making your ownership of the product profitable.  This is kind of like renting with the option to buy.  You buy something, and then when you’re done using it or you don’t need it any more, you can get your money back.

Of course you aren’t guaranteed to get all your money back, but sometimes you can.  When I was single I bought a dining room set for about $250.  Foxy Lady hated it so when we got married I sold it for about $300.  I got the use of a dining room set for a couple years before profiting $50.  Not bad.  We’ll probably do the same thing with the baby furniture.  We bought it for $400, had two boys grow up using it, and in a year, when Mini Fox is ready for a big boy bed, we’ll sell it for $400 or $500.  Not a bad deal.

Mini Fox enjoying the confines of our Craigslist crib.


The whole point of all this is that in a real way the costs of stuff you buy is going down.  That’s DEFLATION, not inflation.  Of course, there is a little more work that goes into using something like Craigslist, but I have found it isn’t very much.  But with this, the stuff you buy new is more valuable because it will have a higher resale value when you do decide to sell it.  And the stuff you buy used you are getting at a substantial discount.  If you buy and sell used, you’re costs go down even more.  Add all that up and it just goes to show that there are ways around inflation and keeping your prices down.


Environmental impact

So for in the column I focused on the costs of the stuff you’re buying and selling, and that makes sense because this column is about inflation and personal finance.  But there is also another major advantage of buying off Craigslist: the environment.

When you buy something used, you taking something that otherwise probably would have ended up in a landfill.  Similarly, when you buy used, some company isn’t mining for iron and copper or chopping down trees or turning oil into plastic.  I think about my Bowflex weight machine.  Just the mass alone, probably 200 pounds of plastic, rubber, and steel; all means that all those raw materials can stay in the ground.  I don’t know if that is important to you.  It’s important to me.  The fact that I can save money and do something good for the environment makes this a double bonus.


Either way, it shows that inflation isn’t near the specter that people make it out to be.  What about you?  What have been some of your finds on Craigslist?

2015 was an awesomely tame year for inflation


About two weeks ago, the US government published their final inflation numbers for 2015.  The inflation number for the year was low, really low, like 0.1% low.  This is a crazy low inflation rate.  Just to put that in perspective, since 1950 (the year Grandpa Fox was born, incidentally) there have only been two years that have had lower inflation readings, 1955 (-0.4%) and 2009 (-0.4%).

The low inflation numbers were primarily driven by the plummeting oil prices, and how that has translated to cheaper gasoline and, to a lesser extent, cheaper home heating costs as well as things related to oil prices like airline tickets.  Those costs were low enough to offset price increases in areas like housing and food.

This is all well and good, but what does it matter?  As a loyal Stocky Fox reader, you’re probably asking the more important question, “Is the low inflation good for me or bad for me?”  There’s a lot of debate on this issue about what the optimal level of inflation is for the larger economy.  Obviously inflation that is too high is bad, but many also argue that inflation that is too low is bad as well.  There’s a lot of deep water there that I won’t tackle in this post.  But if you look at things purely from a personal perspective of you being a saver, low inflation is always good and the lower the better.


How much is a 0% inflation year worth to you?

Let’s use an example of Mr Grizzly.  He’s a spry 30-year-old who starts saving $1000 per month, has an average investment return of 6% but faces inflation 3%.  By the time he’s 65, his honeypot will be worth about $1.4 million, but as we know because of inflation that would only be worth $500,000 in today’s dollars.  That’s still a lot of money, but inflation certainly took a big bite out of it.

Obviously we know that the impact of inflation can be enormous (and I maintain, it’s overstated), and if we assumed inflation was 2% instead of 3%, then his honeypot at 65 would be worth $710,000 in today’s dollars instead of $500,000.  That’s powerful stuff.

But that assumes for several decades that inflation is lower.  Who knows what the future holds.  In the past 30 years (1985 to 2015) inflation has averaged about 2.7%, but in the 30 years before that (1955 to 1985) inflation averaged 4.6%.  Those are big swings and show how hard it is to predict inflation over really long periods of time.

Let’s look at Mr Grizzly’s situation again.  Remember he’ll have $1.4 million when he turns 65, but that’s only worth $500,000 in today’s dollars.  That’s assuming ever year has 3% inflation, but what if one of those years was a 0% inflation year.  Just one year.  All the other 34 years stay the same, but only one year changes.  This is kind of like the scenario that just happened in real life, 2015 had 0.1% inflation and then assume the next 34 years go back to that 3% average.  In this case, the impact of that one year of no inflation increases his $500,000 by about $15,000!!!

Doesn’t that seem like a lot?  Mr Grizzly didn’t save any more nor did he invest any differently.  He just looked at the inflation number and saw that in one year during his investing lifetime, inflation was zero.  And for that effort, his honeypot will be worth $15,000 (in today’s dollars) more to him than it would have otherwise been.  That’s a 3% increase!!!

A low year for inflation is like buried treasure if you are an investor.

The point of all of this is as investors, we got handed a nice little gift from the investment gods in 2015 in the form of no inflation.  While most people are understandably focused on their returns, which in 2015 weren’t all that hot, there’s not nearly the attention given to inflation.  But we can see from the example with Mr Grizzly that this can be a really positive effect.

So there you go.  I always root for lower inflation, and I was super stoked to see it stay so low, to the degree I trust the CPI readings.

Biggest investing mistake—Forgotten money

Lost and Found 2

On this blog we talk about a lot of ways to scrape out a little bit higher return for your investments, or shave off some of the expenses.  That one or two percent may not seem like a lot, but over time 1% can really add up.

However, what if I told you there was a mistake a lot of people make that doesn’t cost them one or two percent of their investment, but costs the entire amount of their investment?  What if I told you Stocky Fox himself came really close to making this mistake?

Forgetting your money.  It seems absurd that you would ever “forget” about the money you have worked so hard to save, yet this happens to people all the time, maybe it’s happened to you and you didn’t even realize it (that’s what “forget” means), and it almost happened to Stocky.


My close call

As you know I left my job at Medtronic a while back.  Like so many, much of my nestegg was tied up there—my 401k, Medtronic stock options I had received, Medtronic stock I had purchased at a discount, money I had set aside for a flex spending account.  When you switch jobs you’re especially vulnerable to “forgetting” about your money because you have to move it (sooner or later) to a place that isn’t dependent upon your former employer.  Probably similar to when your packing up all your stuff after a hotel stay, you’ll probably get most of it and certainly the most important stuff, but you might forget something that isn’t top of mind.

To make matters worse for me, Medtronic just merged with Covidien so the companies that held all the accounts changed.  Our 401k was with Vanguard but got switched to Aon Hewitt; our stock purchase account went from Wells Fargo to Fidelity; our stock options went from Schwab to Prudential (I think it was Prudential).

So, if you use that hotel analogy, I thought I got all my stuff, but if I did forget anything it would be nearly impossible to find it because they kind of changed the location of the hotel after I checked out.  But I wasn’t really worried because I tend to be on top of this stuff.  I am Stocky Fox after all.

Fast forward and the Fox family moves to North Carolina.  Because we bought our NC house before our California house had sold we had to scrape together a lot of money for the down payment.  That worked out well because when I quit my job all my stock options expired, so I had to cash those out anyway.  We just used that money to go to the down payment.  Simple story right?  All well and good.

As it turns out, I did exercise all those stock options, but didn’t get the check for all of them.  For reasons that aren’t worth diving in to, the money for my most recent options couldn’t be sent to me for a while longer.  I didn’t realize that, and I thought I had gotten all the money.  Wrong.  There was still about $8000 of the Fox family’s hard earned money sitting at Schwab that I had stupidly forgotten.  But then, because of the merger, that money I didn’t know about got moved to Fidelity.  So I had money I didn’t know about in a place I didn’t know existed.

Luckily, Foxy Lady’s 401k is with Fidelity so I log in there every once in a while to check on that.  One time when I was at the Fidelity website, just on a wild lark, I put in my old username and password (my 401k from another employer was with Fidelity).  To my shock, there was $8000 in my account.  It took a little bit of digging and calling them to figure it all out, but that was the money I had thought I had taken (just like the shirt hanging in the closet of the hotel you thought you packed).

Since then I have double and triple-checked all the old accounts and called the new places that have the accounts and I’m pretty sure that I haven’t left any money behind.  But I was pretty sure I had done that before, so I don’t know how “comfortable” I should be.


How this might affect you?

Maybe the details are different, but this same story happens ALL THE TIME.  I help out a lot of people with their finances, and it’s not uncommon for people to say after they’ve shown me all their accounts: “That’s pretty much it.  But you know what?  I think I had something with someone from that job three jobs ago.”

Maybe it’s not a lot of money (if it was a lot of money, you’d probably remember it), but it still adds up.  That $8000 for me will probably grow to $50,000 by the time I’m 65.

Obviously it’s not easy to remember things you have forgotten; that’s what the word “forget” means.  But if you know this can happen, you can put your guard up and maybe be a little more diligent.  A few of the common ways this can happen, based on my own experience and that of people I work with, are:

  • 401k from previous jobs—this is probably the single most common example. A good practice is to know where all your money is.  When you switch jobs, this is a time when you really can take it all with you.
  • Other investment accounts with your job—like my situation, you might have money in other places with your employer.
  • Life insurance—Foxy Lady has a policy that her dad, Papa Ocelot, set up for her when she was a little vixen. It has a cash value and every year we get a statement on it, and every year we don’t do anything with it and the cash value steadily decreases.
  • Money when you move—If you move you have about a thousand balls in the air. Often times you might have a deposit with a utility or you have prepaid for a year with your insurance or something else.  That money is yours but you might have to put a little effort in to get it.  Otherwise, it will just sit like an orphan is some abandoned account.


The point here is obvious.  We all work hard to earn money, and even harder to save it.  And of course, no one intends to do this.  But so many things can hit you at once and even someone who is really on top of their finances (as I believe I am) can let something fall through the cracks.  But this is the easiest money you’ll ever make.

Do yourself a favor tonight.  Take 15 minutes to go back in your head and try to remember all the places you’ve saved money—that 401k account, those savings bonds your late uncle gave you as a kid, what ever.  Can you account for it all?

January 2016—putting it in perspective


You may recall a couple weeks ago that my mother-in-law, Mimi Ocelot, wrote an email expressing concern that the stock market was going to hell.  It was pretty understandable.  Two weeks into the new year and stocks had fallen 9%.  Wow!!!

Now that the month is over, let’s take a look at things and try to put them all in perspective.  How bad was January 2016 for investors?


Remembering the first two weeks of January

First, let’s just quickly recall how the month started.  After two weeks it was down 9% and then by Tuesday of the third week, it dropped even more, bottoming out at 11% below where things started for the year.  As you may remember, we looked at how bad that those first two weeks were from a historic perspective.

Since 1950, there had been 19 other two-week periods that were as bad as the first two weeks of January.  One way to look at it is there have been 1716 two-week periods since 1950 (66 years times 26 two-week periods per year).  So if 19 of those 1716 two-week periods were worse, that means things were worst about 1.1% of the time.  Any time something is in the 99th percentile of badness, that’s a big deal.

It was a tough couple weeks with everyone on TV has having a hissy fit about how the stock market was just terrible and all sorts of other crap.  And then this happened . . .


How the month ended


As I said, the third week started tough, dropping another 2%, but then things started to turn around.  By the end of the third week the market had gained 4% off its lows, finishing only down 7% for the month.  In the fourth and final week of the month, stocks had another good week, increasing about 1.5%.  So after all the carnage, stocks finished down about 5.5% for the month.

A month that is down 5.5% is obviously not a good one, but how bad is it really?  If you look at that same data from 1950, there are 792 months.  How many of those 792 months do you think were worse than January 2016?  If you guessed 66, you’re a winner!!!  66 seems like a lot actually.  That’s about 8% of the time.

Hmmmm.  66 months have been worse than this January.  66 times over 66 years.  That means that on average we have a month this bad once a year.  The last time we have a worse month was August 2015, and before that was May 2012, and then both August 2011 and September 2011.  How many of you remember any of those months as being really bad months for investing?  I’m guessing no one, and that’s the point, right?  During the time, it was probably bad, but then we moved on and the stock market continued its relentless upward trend.

Of course things are never steady and predictable with the stock market.  From 1990 to 1997 we had an eight year streak without a month as bad as January 2016.  Other recent streaks were five years starting in 2003 and most recently a three-year streak starting in 2012.

Conversely, in the depths of the Great Recession, in a six-month period starting in late 2008 there were FIVE months that were all worse than the one we just had.  Five out of six is bad.  OUCH.  And you know how that ended—everyone freaked out but those who kept their cool saw their investments completely recover and then some.


The point of all this is that the stock market has wild swings, and I have argued that the swings have gotten wilder in recent years.  At any given moment things may look crazy, but time has a way of evening this stuff out.  After two weeks it looked awful for the stock market.  We had a 99th percentile train wreck on our hands.  Two short weeks after that, things went from 99th percentile bad to 92nd percentile bad.  That’s a pretty big difference, a big improvement.

So as we wrap up January, no point sugar coating it, the month sucked for investors.  But also let’s not press the panic button either; months like this happen pretty frequently.  I hope that helps you sleep better at night.