Stocky – Page 15 – The Stocky Fox

What’s causing the volatility? Part 1

January 21, 2016January 22, 2016 Stocky Leave a comment

On Tuesday I responded to an email from a worried Mimi Ocelot about the free-fall the stock market is going through right now. I provided a historical perspective of what is going on. In this post I am going to give some reasons I think we’re experiencing all this increased volatility.

And I need to apologize. I started writing this and it got so long (I try to keep my posts at about 1000 words) that I need to split this into a part 2 and a part 3. So enjoy this and then tune in tomorrow for the exciting conclusion.

“The times they are a changin’”—Bob Dylan

As I wrote here, the volatility in the market is definitely going up. Of those 17 two-week periods as bad as this one since 1950 that I mentioned on Tuesday, eight occurred in the fifty years from 1950 to 2000 which means that nine occurred in the fifteen years from 2000 to 2016. There’s no question that the market has become MUCH more volatile lately. Is this a temporary thing or a new normal? Who knows, but I tend to lean towards “new normal”. Now let’s try to figure out the “why” part of this mystery.

“Ready, Fire, Aim” –Tom Peters (1982)

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

marquee-787

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

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

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

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

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

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

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

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

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

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

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

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

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

This seems like a good stopping point. We we’re almost done. Come back tomorrow, same fox time, same fox blog, for the exciting conclusion to “What the hell is going on in the stock market?”

Two weeks into 2016 and already down 8%–OUCH

January 19, 2016January 22, 2016 Stocky 3 Comments

Dear Stocky,

Is anyone else besides me getting nervous about what’s happening in the stock market lately? I always thought that the stock market did well in an election year but they’ve been going down. I guess today things are a bit better. But what do you think is going on?

I need to read some of your calming words again……

Mimi Ocelot

Here is an email that I got last Thursday. The ironic thing is the market was up Thursday, but then crashed again on Friday, down about 2.5%. So it’s understandable that Mimi Ocelot is nervous.

Also, for the sake of disclosure, Mimi is my mother-in-law, Foxy Lady’s mom. Having known her for nearly 10 years, I can say she is definitely a nervous soul, but with the craziness going on in the market it’s understandable that even the heartiest of souls could be getting nervous. Here is my take on the latest market gyrations.

“Just the facts” –Joe Friday, Dragnet

First, let’s look at the facts. The thing about the stock market during election years is a bit of an old wives’ tale. If you look back to 1950 (when the S&P 500 started), the returns during presidential election years averages about 7%, and the returns during other years averages about 9%. So election years are a little worse, but they are both pretty good. So this is another instance where people try to predict the market and they find they’re right about half the time and wrong about half the time.

Now let’s try to put these first two weeks of 2016 into perspective. Stocks are down over 8% which is a pretty crazy steep fall over two weeks, but it’s not unprecedented. Since 1950, there have been 17 two-week periods that had falls this bad or worse. And of those 17 instances, 11 of them saw the stocks recover to their “pre-drop” levels a year later. So that tells you most of the time you have these steep drops but the recovery is not that far off.

The other 6 times you ask? One instance was during the 1987 market crash, and the other five were from the 2001 internet bubble or the 2008 financial crisis. So maybe the recovery took a little longer, but not much. After a couple years, stocks were hitting new highs.

So if you want encouraging words, I am definitely optimistic. We’re going through a tough time, but nothing all that different from what happens every few of years. Actually, the things that fundamentally affect the value of the stock market—a strong economy, innovation and scientific advancement, new products—all seem positive. So I wouldn’t be worried. Of course, Foxy Lady and I have a much longer time horizon that Mimi Ocelot so we can ride out a longer storm. But things will be fine.

That said, there are some interesting market dynamics going on, especially lately. I actually have a lot to say on this so I am going to break this up into a two-parter. So tune in on Thursday to hear what I think is driving all this craziness.

Picking your investments for 2016

January 6, 2016January 5, 2016 Stocky Leave a comment

The new year is a special time for me. It’s a fresh start and a time of rebirth (even though it happens in the dead of winter). You make resolutions, many of which you won’t keep, because this is the time to think about what you want to do before you get sucked into the rigmarole of actually doing it all.

For investing, it’s a natural time to reflect on your financial situation. Am I saving enough to get where I want to go? Am I investing that money in the places that make sense? For this post I want to focus on the second question of where should you invest your money, and particularly should you change it from one year to the next.

Every year you have investments that do well and others that do poorly. When you look on 2015 you’d see that international stocks (down about 4%) didn’t do nearly as well as US stocks (down about 0.2%). Based on that what should you do?

One school of thought would be to invest more with US stocks. If they did better last year, then it stands to reason that they’ll continue to do well since there probably hasn’t been a lot that has changed. So stay with that winner.

The opposite school of thought is that the international stocks had a down year so they are probably “due” to do better. Intellectually, I think this is the much more tempting strategy. We know that stocks can’t continue incredible performance forever; eventually they will have an off year. We also know that a well-diversified portfolio can’t continue to suck forever; eventually they will rebound (like stocks after 2008).

To answer this question with a little more analytic rigor I used my handy dandy computer and some free data from the internet. Just to make things simple, let’s assume we live in a world with only two investments: US stocks (VTSMX) and international stocks (VGTSX). As I mentioned, in 2015 US stocks did better than international. So should we invest more in international?

Using data going back 19 years (that’s when the international index fund I am looking at started), the US fund has beaten the international fund 10 times. That’s almost dead even—10 wins for US and 9 wins for international.

But the “wins” are very streaky. US stocks performed better in 2015 as they did in 2014 and 2013. On the other hand, International stocks outperformed US stocks for five years in a row starting in 2002. Based on those snippets, you would have been worse off by switching your investments to last year’s underperformer.

If you look at all 19 years, there were 8 years when the lower performer from the previous year did better the next year. Again, that’s about 50% of the time—8 years where the lower performer did better the next year, 10 years where the higher performer did better (it doesn’t add up to 19 because we don’t know which will do better in 2016).

Year	Investment that did better that year	Investment that did better the next year
2015	US
2014	US	US
2013	US	US
2012	Int	US
2011	US	Int
2010	US	US
2009	Int	US
2008	US	Int
2007	Int	US
2006	Int	Int
2005	Int	Int
2004	Int	Int
2003	Int	Int
2002	Int	Int
2001	US	Int
2000	US	US
1999	Int	US
1998	US	Int
1997	US	US

In a way the data is comforting, and it came out the way I predicted since I am a believer of efficient markets. These theories on which stocks will do better tend to work about as often as it doesn’t. Instead of spending a lot of time and effort trying to “figure out” which investment will do better, you’re probably best served just sitting tight.

The Fox family invests about equally between US and international stocks. That means international stocks served us very well in the early 2000s but not so much the last couple years. As far as next year goes, who knows? I could tear the data apart and analyze it a million different ways, and I’d probably come out with something that said “doing it that way is better 50% of the time, and doing it the other way is better 50% of the time.”

So as the Fox’s take stock (pun intended) of our finances, we’ll continue plugging along with the same diversified investments we’ve used in the past. Instead of trying to figure out which investment will do better this year, I’ll send that energy trying to figure out where Mini Fox hid the television remote.

2015 year in review

January 4, 2016January 3, 2016 Stocky 1 Comment

I hope everyone had a great holiday season and a happy new year. For us, the cubs got too many gifts under the tree (note to self: next year, make Christmas less materialistic). I was the only one still up to ring in the new year, and I did that binge watching A Game of Thrones.

We made it through a pretty wild year for stocks. In no particular order, here are some of the major stories, events, decisions, and issues that drove the stock market:

Down year for US stocks—This was the first year since 2008 that the US markets had a down year. That’s pretty good: a 6-year streak. And this year really wasn’t that bad. US stocks were down less than 1%, so I suppose if you are going to have a down year, this is the kind you’d like.

Of course, even though stocks ended the year very nearly where they started, it was a crazy ride in between. At one point, stocks were up for the year about 4%; a couple months later they had lost all those gains and then some, being down about 6% for the year. After all those zig-zags, they settled where they started. There’s probably a lesson there, that if you stay calm and look past the short-term craziness, these things tend to work out.

International stocks still struggle—International stocks had a much tougher year than did US stocks, being down about 2-4% (depending on how you define “international stocks”). As wild as the ride for US stocks was, it was even wilder for international stocks. They started out like a bat out of hell, gaining about 10% by the time summer came around, but just like their US counterparts, they swooned in the fall, losing all their gains and then another 4% or so. That’s pretty crazy, a 14% swing in a couple months.

Looking back on the major stories that drove that, to me there are two: Greece and China. The Greek epic (or should I call it tragedy?) continued with high-level brinksmanship rattling the markets as the deadline for their debt loomed. Sadly, the powers that be kicked the can down the road, giving Greece another short-term loan that will carry them for a couple years. Mark your calendar, we’ll do through this whole thing again in 2017.

China also rattled the market. After years of 8-12% economic growth, China’s economy has started to show some real signs of slowing down. In 2016 most experts are predicting something in the range of 6%. Make no mistake, that’s still a lot of growth, much higher than the US’s 2% or any other developed nation’s. But that’s a major pull back for China, and of course that directly translates to a lower market.

Finally, there was the horrible terrorist attacks in France. This was probably the biggest story of the year, so that’s why I mention it. However, as deplorable as they were, they pretty much had no impact on the stock market (they took place in November which was a mixed month for the markets). Sure, the days following the attacks the markets were a little shaky, but that wore off when people started to realize that companies would still produce products and people would still consume those products. I bring this up as a reminder that many of those events that are most troubling to us have little impact on the stock market.

Fed raises rates—After seven years of keeping interest rates at about 0%, in December the US Federal Reserve raised interest rates by a whopping 0.25%. A quarter percent really isn’t that much, but this was largely symbolic. During the 2008 financial crisis, the Fed dropped rates to that 0-ish% level, the lowest they had ever taken rates in history. I certainly look at this as good news, in that the Fed thinks that the US economy is strong enough to withstand higher interest rates without slowing growth or raising unemployment.

So that’s the year in a nut shell. When you take an entire year, and condense it to a few hundred words, I think it does put things in perspective, especially with the stock market. In 2015, there were probably over a billion words written on what was happening, what had just happened, and what would happen the next day. In the end, we had a flat year. To me this just shows how much energy and emotion gets put into this stuff which is largely wasted. You can just invest your money and then focus on other, more important things like if the Broncos can win the Super Bowl or if Jon Snow is really dead.

Finally, I would be remiss if I didn’t thank you readers for taking this journey with me. I am especially thankful to all those who left comments and helped me make this blog and fun and informative one.

Here’s to a great 2016. As to what I think will happen: I have no idea but I am fully invested.

Saying “I Do” impacts what Uncle Sam says he’ll take

December 31, 2015January 25, 2016 Stocky 1 Comment

Foxy Lady and I have been thinking about getting a divorce. We don’t want to leave each other or be with someone else. We still love each other, probably more now having been through 6 years of marriage and having brought two amazing cubs into the world, than when we were first married. And let’s be honest: there’s no way I could do any better. Foxy Lady is foxy, is an amazing mom, has a high-powered career, let’s me stay at home with the cubs. She probably could do better, but don’t tell her that.

So we still want to remain fox and vixen, but just not in the official “married” sense. What gives? Since it’s a topic of this website, it probably has something to do with personal finance. By being married we pay about $15,000 more in taxes than if we were living in sin as two single foxes. Let me explain:

The federal tax code (and that of many states) is extremely complex and curiously set up. It is meant to be progressive (wealthier people pay a higher percentage of their income in taxes), but in an attempt to achieve that goal, lawmakers have created a bit of a cluster that has some seriously screwed up features. The “marriage penalty” is one of those.

Paying more if you’re married

Let’s look at two nearly identical couples: Mr and Mrs Leopard who are married, and Mr Tiger and Ms Lion who have been living together but never tied the knot. Mr and Mrs Leopard each have good jobs and each make $100,000. Similarly, Mr Tiger and Ms Lion each have good jobs and each make $100,000.

Mr and Mrs Leopard file jointly and owe taxes of $43,000 on their $200,000 income. However, Mr Tiger and Ms Lion together owe taxes of $39,000 on their $200,000 income. What the hell?!?!?! Mr and Mrs Leopard are seriously pissed. Mr Tiger and Ms Lion just paid for their annual family vacation Disneyworld. Or better yet, they can use that money to fund an IRA and in 30 years they’ll have an extra $320,000, thanks solely to the fact that they never said “I do.”

That seems like a pretty big deal. Being married or not has a 10% impact on the amount of taxes you pay. How is that possible? This is fundamentally an issue of figuring out who the IRS thinks is rich, remembering that we have a progressive tax code.

The IRS looks at two people with a combined income of $200,000 as being richer than one person making $100,000. Maybe that makes sense. The couple is probably pooling expenses like housing and the bills that go along with that. A single person is bearing those housing expenses on her own. That, in a nut shell, leads to the IRS taxing the $200,000 couple more than the $100,000 individual.

That’s all well and good until you have situations like Mr Tiger and Ms Lion. The rationale that the expenses for two single people go out the window because they are really acting like they are married, sharing their living expenses just like Mr and Mrs Leopard. When you choose filing status you can pick “Single” or “Married” but you can’t pick “Single but pretty much act like we’re Married.” That’s the loophole.

Paying more if you’re Single

The opposite effect also occurs. Imagine Ms Ocelot and her boyfriend Mr Panther. Ms Ocelot has a high powered career where she’s making $200,000. Mr Panther is a freeloader who watches TV and plays video games all day and occasionally writes on his blog which doesn’t generate any money.

Ms Ocelot pays $50,000 in taxes on her $200,000 income. But if she made an honest man out of Mr Panther, their tax bill would fall to the same $43,000 that the Panthers pay.

That $7000 annual difference is just the same effect as above, but in reverse. The IRS views a single person making $200,000 as being richer than a couple making that same amount. Again, it kind of makes sense; that income is only supporting one person in the “single” example but two people in the “couple” example.

What it all means

“Stocky, what is the point you are trying to make? Surely, you aren’t suggesting deciding on marrying someone based on the tax code.” I kind of am. Are you married because the state of Illinois or the US government says you are? Not really. You’re married because you love your partner, you want to take on life together with that person, you are committed to her until the end of your days. That’s how it is for me.

If the government said there was a clerical error and our marriage certificate was never filed so I wasn’t actually married to Foxy Lady, I wouldn’t love her any less. I wouldn’t be less committed to her and the two cubs we’ve brought into this world together. Actually, I have a few friends, and maybe you do too, who are as committed to each other as any married couple, but they aren’t married in law.

But since the federal government says Foxy Lady and I are married, legally we MUST file as “Married” and that ultimately leads to us paying about $15,000 more in taxes than if we acted in the EXACT same way but just never signed that piece of paper six years ago. And that’s serious money. $15,000 in our case or $4000 in Mr and Mrs Leopard’s case or $7000 in Ms Ocelot’s case really adds up. Over a life time, that could be a million dollars.

Marital advice from Stocky

So does Stocky endorses people who make similar incomes to not get married and couples where one person makes a lot more money to get married? It seems severe, but why not? This is one savings strategy that could pretty much fully fund your retirement.

Of course there’s the big caveat that you need to be in a very strong relationship. One so strong that legally being “married” or “single” doesn’t impact the real-life state of your relationship. If yours is at that level then seriously consider taking the free money the IRS is making available.

Yet, when I give that advice to people, recommending that they get divorced (but remain totally committed like they were married), they look at me like I’m crazy. How could I even suggest touching the most sacred of unions for a few bucks. Totally get it. And to date, no one has followed my advice on this, so there you go. But if your marriage is such that it can survive the US government saying your single, there could be some serious dollars in it for you.

You’ve ready my crazy theory on how to reduce your taxes. What do you think?

Investment returns of home improvements

December 28, 2015December 27, 2015 Stocky Leave a comment

As many of you know, the Fox family moved from California to North Carolina when I quit my job and Foxy Lady got a great job with VF Corporation. Part of moving is getting a new house, and part of getting a new house is fixing it up and updating it so it’s just the way you like it.

So often people look at home improvements as an “investment”. And most of the time they misuse that word. To me an investment is something where you pay money now with the expectation of getting that money back in the future plus a return on top of it. Most home improvements aren’t investments at all; they are just expenses. For example, painting the rooms in your house isn’t an investment. You’ll never get that money back. It’s not to say that you shouldn’t do it. Maybe you’ll really the new look of the room and that will make it worth it. But don’t say it’s an investment.

In fact, it’s pretty well accepted that almost every home improvement you do will give you a negative return. Of course, that doesn’t mean you shouldn’t do it. It’s just you should do it because you’ll enjoy your new kitchen or your three-season porch or your hot tub, not because you think that $10,000 you paid will increase the value of your house by $11,000.

All that said, there are a few home improvements that we’ve done, or are considering doing, that might make good investments in the “finance” meaning of the word:

CFL and LCD light bulbs

LED.BULB.A23-150W

In the past few years there has been a real revolution in light bulb technology as traditional incandescent bulbs have given way to newer, more energy efficient technology. In our new house we had a lot (probably 60 or more) light bulbs in the house, all of which were the older, incandescent kind. Would it be a good investment to change all those out for LED bulbs?

To do the calculation, you have to estimate how expensive electricity is (in North Carolina it is about $0.12 per kWh) and how much you use that bulb each day. For a bulb you’re using a lot, that might be 4 hours a day or more. Then you have to compare the cost of an LED bulb to a regular bulb. In the past couple years prices for LED bulbs have come down precipitously (deflation); just a quick search on amazon.com shows that you can get an LED bulb for about $4 (with an expected life of about 18 years) and an incandescent bulb for about $1 (with an expected life of about 2 years). Of course, the reason you would do that is beyond LED bulbs lasting a lot longer, they also use about 85% less electricity. So it becomes a pretty simple calculation of does the longer life and electricity savings make the higher price of the bulb worth it?

This is a big, fat YES. The calculations show that the investment return on an LED bulb is about 120%!!!! So you’ll get that extra $3 you spent on the more expensive bulbs and then some, every year for the 18 year life of the bulb. Friends, it doesn’t get better than this. We live in a world where the stock market gives us 6-8% on average but with a ton of volatility. This is a sure thing—basically a bond where you’re guaranteed to make money on your investment.

Roof-top solar panels

Back in California it seemed like everyone had solar panels. Out in North Carolina, they are much rarer. We have decided to become trend setters and install the panels on our roof. Unlike the LED lights, where you could probably dig in your sofa cushions to find enough to pay for a light bulb, solar panels represent a huge up-front cost.

We’re looking into a 20-panel system that would generate about 4000 watts of electricity. The all in cost would be about $18,000, but after you take into account tax credits, the cost ends up being about $14,000. That’s a lot of money for sure, but you do get something pretty sweet, namely a lot of cost-free, pollution-free electricity.

When you look at our location, the pitch of our roof, the direction our roof faces, and all those other factors, those 20 panels would generate about 800 kWh per month. That would be subtracted from the ~1200 or so kWh we use per month, and at about $0.12 per kWh, those panels would save use about $100 per month.

If you do the calculations, that ends up being a 5% return which isn’t great considering the risks of the panels breaking or the energy company changing the regulations to not be so generous or something else that I can’t even think of right now. On the other hand, if you assume that the cost of electricity increases 5% per year, the return jumps to about 10% which is pretty decent. And depending on your personal views regarding the environment, the return on your money may not be as important as reducing the need for about 10,000 kWh per year of coal-generated electricity (that’s about 7 tons of CO2 per year).

We’re still thinking about doing this or not, but I think we will. But for this, the motivating factor is not the investment return (which is a “neutral” for me) but the environmental impact.

Vacuum robot

Foxy Lady and I got each other an iRobot vacuum for Christmas. It cost about $400. It’s a pretty cool little device but certainly not the Rosie the Robot that they might have you think.

We have found that it does a decent job in smaller areas, but you can’t really let it go and “clean the entire house”. That said, we have two little cubs who create a concentrated mess in our kitchen/dining nook/living room area. Seriously, Foxy Lady and I try to keep up and we’ve made the depressing comment on more than one occasion: “Didn’t you just vacuum in here?” The area just seems perpetually dirty, particularly below where the cubs eat.

So we set the robot to do its thing every other day. It does a decent job, certainly not as good as if a person was doing it, but that’s the beauty of it—it’s cleaning while you’re off doing something else. So I’ll give it a solid B.

But how is it as an investment? Not very good. We have a cleaning person come in every two to four weeks to clean our house. We pay that person $80, so if the vacuum robot saved us a trip or two, it might lead to a decent return. But the truth is that the vacuum robot only does the floors, and really only that limited area. We still need the cleaning person to actually mop the floors in the kitchen/dining nook/family room as well as vacuum and mop the rest of the house. Plus there are all the other house cleaning activities (bathrooms, windows, counters, etc.).

So we use the cleaning person just as often with or without the vacuum robot, making the return 0%. Life is definitely nicer when the floors aren’t totally gross, but that makes it a good purchase, not a good investment.

This blog is already starting to get long so I’ll stop here. But I could also do this on our learning thermostat (low return), tankless hot water heater (low return), new television (surprisingly high return). Please let me know if there are any other home improvements that you are thinking about and wondering what the return is. In the meantime, replace all your incandescent lights with LED lights, and it will be the best investment you can make.

What to make of pensions

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

Medtronic is such an amazing company, for so many reasons. Beyond that whole “create amazing medical products that help people live healthier, fuller lives,” they offer some incredible financial benefits to their employees to help them build a comfortable financial future.

One benefit in particular is they give each employee and extra 5% of their pay which they set aside in a pension account. When you leave the company, they give you that money either in a lump-sum or they will give you a pension for the rest of your life. It’s an awesome benefit, but it involves a difficult choice: do you take the lump sum or do you take the pension? Here is how I made that choice, and the different factors I took into account.

When I left Medtronic, my pension account had about $50,000 in it. Medtronic could give me that in the form of a lump sum, or, based on my age (38 years old), they would give me a monthly pension of $220 until my death. So which one did I pick? Which one would you pick?

The case for taking the lump sum

There’s something to be said for getting the cash all up front. Those monthly pension payments come only so long as Medtronic is able to pay them. Right now they are an extremely strong company financially, but we’ve seen many times how strong companies can fall on hard times and lose their way. This is especially true after major mergers (Time Warner with AOL, Boston Scientific with Guidant, etc.) and Medtronic did just merge with Covidien. I have absolute faith that Medtronic will be able to pay me, but if you get the money up front, that’s one less thing to worry about.
When you get the money, it is usually rolled over into an IRA so you don’t pay taxes on it (if you take it in actual cash, there are major penalties similar to if you cashed out your 401k). So you aren’t paying taxes on the money when you’re younger and you’re probably in a higher income bracket.
The biggie is that you get to invest that money and then have it available when you turn 60. For me that’s a 22 year time horizon so I could invest it pretty aggressively in the stock market knowing that over that long of a time the probability is extremely high that the money will grow a lot. Just using some basic assumptions, that $50,000 would probably be worth about $180,000 when I turn 60.

The case for taking the monthly pension

You can use the monthly pension for today’s expenses. $220 isn’t a ton, but it’s still a nice chunk of change. Just looking at our budget, that could pay for our internet, cable, and car insurance. That’s not bad. Basically I’ll have those “free” for the rest of my life.
A pension is a nice way to diversify. As I mentioned here, most of our savings is in stocks which is appropriate given our ages and personal situation. We have very little in bonds and other safer investments, so having a pension fills a little bit of a gap we have.
When faced with the choice of taking a pension for $220 per month or getting a lump sum of $50,000, the pension is the better deal. If you shopped around for an annuity a 38-year-old male could get a $220 per month, and it would cost about $55,000. So basically by picking the pension option from Medtronic I’m getting an extra 10% compared to what it would cost me to buy it in the open market.

There are good reasons to go either way. Foxy Lady and I struggled with this a lot. For us, it was a choice of going with your head (you’d choose the lump sum) or your heart (you’d choose the pension).

Financially, it’s a much better option going with the lump sum because you can invest it and let it grow. When we’re 60 we could take all that money and buy an annuity worth $720 a month. Given that Foxy Lady and I don’t need the income right now because she’s working and I’ve found a little bit of work on the side, it’s a better deal to take the bigger number when we do stop working.

But the heart wants what it wants. There’s something comforting about getting a tiny income stream now that you know will always be there. It’s not dependent upon the stock market or anything, and if everything did go to hell with the stock market in some catastrophic way, we would have this little bit. Plus, as I mentioned earlier, we have a nice little nestegg right now but it’s all invested in stocks. This provides a little bit of fixed-income diversification. For these reason, we ultimately decided to go with the pension.

So there you go, a nice little primer on how to pick between a lump sum and a pension. What do you think? Would you have made the same choice? If you’re with Medtronic, what are your thoughts on the matter?

Working in retirement

December 21, 2015December 20, 2015 Stocky 4 Comments

“What’s your problem Stocky? You started off writing pretty consistently then in the past few months you’ve become super-erratic. Are you abusing some controlled substance? What gives?” This is a question some of you may be wondering given my admittedly abysmal record for posting regularly.

The fact of the matter is that I’ve been busy working, and that hasn’t given me the time to write as many blogs as I would like. Wait???? What???? I was supposed to be retired, so what am I doing working?

When I was seriously considering quitting my job and taking the plunge into early retirement, I read a lot of blogs on the subject (the best one being www.mrmoneymustache.com). Most offered pretty similar advice: take the first few months to decompress, but after a while you’ll get bored and what to do something meaningful.

For a lot of earlier retirees that “something meaningful” can be a second career, where they’re doing something they really enjoy but that also generates a little income. When I read that, I was really skeptical. I’m good with spreadsheets, but how could that translate to something people would pay good money for but which wouldn’t have the “pain-in-the-ass” qualities of a real job?

So I sauntered off into retirement without any expectations of earning an income. Foxy Lady and I had run the numbers a million ways and we were all set to live on her income and enter this new phase of our life. So that was that.

How it happened to me

After a week or two in retirement I got an email on LinkedIn asking if I would be interested in working for a smaller company running their sales operations department (that’s what I did at Medtronic). I replied that I wasn’t interested in fulltime work, but if they needed help I would be glad to work on a consultative basis. They said “yes”.

A few weeks later, I was catching up with a former colleague. She said they needed some sales operations expertise to help them build the compensation plan for their sales force. Again, I was able to set up a little consulting agreement. A month into retirement, I had two consulting clients who needed help doing the things I did for a living.

This is such a lucky development (but I absolutely believe that you make your own luck), and I really feel like I have the best of all worlds. The nature of the work allows me to work on my own schedule most of the time. Typically I can do the work that needs to be done when the cubs are at fox school during the mornings or in the evenings after they are curled up in their dens. That means during the days I spend the time with them doing all sorts of fun “this is why you retired early” activities like—building dams in the local creek, going to the Science Center and Children’s Museum, making forts out of the couch cushions, etc.

Every once in a while I do travel, but it’s pretty minimal. Foxy Lady and I counted 4 days over the past 6 months that I didn’t sleep in my own bed (and tuck the cubs in). Also, every once in a while there’s a deadline that requires I stay up late, or there’s a conference call that requires a sitter for the cubs. But just like the travel, that has only happened a few times.

Plus, intellectually it’s very satisfying. If you’re the type of person who is able to consider early retirement, odds are you were professionally successful. Sometimes it can be tough trading in the satisfaction of achieving a goal, leading a team, and all those other things for Danny Tiger and building chainsaws out of Legos (pretty much every one of Lil’ Fox’s Lego creations is a chainsaw he uses to cut the legs off our dining room table). Doing consulting has allowed me to stay intellectually engaged, while avoiding all the crap. I don’t have useless conference calls, development plan that are garbage, office politics, and all the other BS that makes you want to consider early retirement in the first place.

Finally, and to the point of a personal finance blog, it has been a bit of a financial boon. I took my salary when I was working, calculated what the hourly rate would be, and tripled it to make my consulting rate. And the companies were happy to pay it. For them, they get someone with expertise in an area they really need, but they don’t need so much that they want to hire a fulltime person for it. Plus they don’t have to pay benefits and all the other stuff. So it’s a pretty sweet deal for them too.

In dollar terms, I’ve pretty much replaced my income. We all know how big an impact a little extra savings can be. So this consulting income, even if it completely dried up after 2015, has really moved the needle for our nestegg.

How it can happen to you

The reason I am sharing all this is because I think a lot of people, me included before six months ago, that don’t really realize what a legitimate option this is. However, many of you probably have really valuable skills that people are willing to pay for on a consultative basis. And this is especially true if your career is one that has enabled you to build up a nestegg that allows you to retire early.

There are a million companies that need database programmers and market researchers and financial auditors and sales ops people. And to reiterate, if you were good enough in your career to amass the wealth to retire early, you’re probably good enough to be really valuable to them.

When I retired, a few of you said something like, “I’ve been thinking about doing the same thing, but I’m just too concerned to leave the comfort of a steady paycheck.” I totally get that, and it’s a sentiment that I shared for a very long time. But my story is an example of what can happen if you close your eyes, grit your teeth, and jump. The rewards can be pretty amazing. Foxy Lady and I marvel at what a great situation we’ve stumbled in to, and none of it would have ever happened had we not taken that leap. We’re so glad we did.

For those of you who have retired early, what have you found in terms of earning opportunities?

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.