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The new year is a great time to take account of things in life.  We look at the year just ended, reflect on our successes and failures, decide how this year will be better, make our resolutions, and take on the new year.

I was all prepared to write a few posts on all that, but then the tidal wave that was December 2018 hit.  I posted last week right at its depths, but even the craziness of the last few days of the year require, neh demand, its own post.  So let’s put a bow on that crazy month.

As bad as it was . . .

I posted last Monday, Christmas Eve, that with a bit over a week to go, December 2018 had already become the 4^th worst month in the 69-year history of the S&P 500.  Going into that trading day, we were down 12% for the month, and then in an act worthy of Old Testament God, the market plunged that day another 3%.  Just in time for the holiday.  Thanks a lot.

It was bad and we were in the teeth of an all-time bad stock market plunge.  If you think of it as the 4^th worst (or 3^rd worst after that Monday) month in almost 70 years, you’d expect something like this once every 25 years or so.  That’s a generational storm.  Batten down the hatches.

. . . and how it ended

But there’s a reason that December ends after the 31^st day and not the 24^th day.  The day after Christmas (obviously markets were closed for Christmas), the markets increased 5% which is a crazy high amount.

Before we look at the larger picture, let’s just reflect on December 26 for a second.  It was the largest point gain day for both the S&P 500 and the Dow Jones Industrial Average.  Also, it was the 18^th largest percentage increase for the S&P—top 18 out of over 17,000 trading days since 1950.  Not bad.

Back to the story, so Wednesday there was a big recovery but we were still down a lot.  But the market kept chugging along each day, and it ended the month up 7% for the lows on Christmas Eve.  Let’s not fool ourselves.  It was still down 9% for the month, but compared to where we were as Santa was loading up the sleigh, that’s not that bad.

In fact, while there’s no doubt that December 2018 was a bad month, it didn’t even rank in the Top 10 worst months of all time (it was at 11).  Not that that should make you feel good, but we were thinking we were being hit with a generational storm, and it ended up being an every 5 or 6-year storm.  Those things happen.

The stock market is a very complex human experiment, but in a lot of ways it’s very simple.  I think the crazy roller coaster ride in the month of December (and more broadly all of 2018) really illustrates this.  Things are never as bad as they seem, and the best strategy is usually to just sit tight and let the craziness work its way out of the system.

I hope everyone has a wonderful Christmas and New Year.  Next up you’ll see how the Fox family did on their investments including the wins and losses, so makes sure you have a box of tissues.

Holy Crap!!!  I was all set to do a post on Fidelity’s zero-fee mutual funds as a follow up to last Wednesday’s post on index mutual funds.  But the stock market has had other ideas.  So far this month stocks have tumbled 12%.  12!!!

There seems like a lot going on that we need to process, so let’s start breaking this down.

Dec 2018 in context

There’s still a week to go, but as it stands right now, stocks are down 12% for the month.  Of course there’s one more week left in the month so things could go up and it won’t be as bad, or things could get worse and . . . well, let’s try to stay positive.

No matter how you slice it, 12% is a lot.  Just to put it in perspective, since 1950, when the S&P 500 started, there have been 828 months, and Dec 2018 ranks as the 4^th worst month of all time.  In 70ish years we’re in the midst of the 4^th worst month. 

Think of this as a generational storm.  I don’t know if that’s comforting or dispiriting.  Months like this happen, and it has been worse in the past, yet this is on the Mount Rushmore of all-time bad investing months.

Just in case you’re wondering what the 10 worst months for the S&P 500 are, here you go:

Month ending	S&P 500 close	Return
Oct-87	252	-21.8%
Oct-08	969	-16.9%
Aug-98	957	-14.6%
Dec-18	2417	-12.4%
Sep-74	64	-11.9%
Nov-73	96	-11.4%
Sep-02	815	-11.0%
Feb-09	735	-11.0%
Mar-80	102	-10.2%
Aug-90	323	-9.4%

Sit tight

What’s done is done.  The stock market has cratered, and unless you have a time machine, you just need to accept this really tough month and then look to the future.  That’s where I think things get a lot more comforting.

You can take that table above and then add two additional pieces of data: how stocks did in the next month and how stocks did over the next year.  That paints a completely different picture.

Month	S&P 500 close	Return	Next month return	Next 12-month return
Oct-87	252	-21.8%	-8.5%	21.1%
Oct-08	969	-16.9%	-7.5%	15.6%
Aug-98	957	-14.6%	6.2%	29.8%
Dec-18	2417	-12.4%
Sep-74	64	-11.9%	16.3%	13.5%
Nov-73	96	-11.4%	1.7%	-28.3%
Sep-02	815	-11.0%	8.6%	12.4%
Feb-09	735	-11.0%	8.5%	38.4%
Mar-80	102	-10.2%	4.1%	28.0%
Aug-90	323	-9.4%	-5.1%	29.2%

Who knows what will happen in January 2019 or the next 12 months, much less the next week (I certainly don’t).  Yet if you use history as a guide, there’s a lot of reason for optimism.

Of the 9 months that made the top 10 that we have data on, 6 of those 9 month saw gains in the stock market the next month.  I would definitely take an even-money bet that January 2019 will be a up month.  But by no means is it a sure thing; look at Oct-87 and Oct-08, the two worst months.  Those were followed up by brutal months.

Things look even better if you push the time horizon out from one month to a year.  For those 9 really bad months, if you looked at the market a year later, things looked good, really good.  8 of those 9 examples saw the market up, and all of those up years were up double digits.  They made up for the bad month and then some.  Of course, November 1973 shows you that’s not a certainty, but the fact that almost 90% the time things recover fully makes me feel pretty good.

What’s going to happen?

As I was doing the research for this post, I was struck by the examples of those really bad months.  Some of them are explainable while others are a bit odd.  October 1987 was Black Monday; October 2008 and February 2009 were the Great Recession; September 2002 was the popping of the Dot Com bubble;and November 1973, September 1974, and March 1980 were all a part of the Stagflation lost decade of the Nixon and Carter debacles.

Those others are a bit odd in that there really wasn’t a powerful reason that has survived the test of time.  I am sure you could look it up, but off-hand I couldn’t tell you what happened in August 1998 or August 1990.  Things were going well and as you can clearly see, a year later that bad month was a distant blot in the rear-view mirror.

I feel like that is what we’ll think of for December 2018.  By all measures things are going well for the economy.  The economy seems to be growing well, unemployment is low, and inflation is tame (between 2-3%).  Those are generally the Big 3 that you look at to see how things are doing, and they all seem okay or even better than okay.

That’s not to say there aren’t risks.  Of course there are, but there always are.  Brexit seems like it will have a rocky landing, the trade war between the US and China looms large, Trump pulling troops out of Syria might destabilizing, sovereign debt continues to pile up, and on and on and on.  That’s true now but there were other “risks” you could have sighted for any of those other Top-10 bad months.  I don’t think things are particularly worse now.

As always, I am optimistic about the stock market.  I think this month will be similar to August 1998 or August 1990 in that the statistics show it was a bad month, but people can’t really tell you much about it because it was in the midst of good times. 

That said, I do think there is the potential that we might be in for a couple lean years, maybe of the +/- 5% variety.  Over the past 5 years, since 2013, the market is up 70%, so it doesn’t seem unreasonable that we’re “due” for a bad year or two.

Similar to the last two weeks, this week is dominated by a social (and weather) story.  Before it was the Google memo and then the unrest in Charlottesville; now it’s Harvey in Houston.  The difference as it relates to this blog is that the impact Harvey is having on Houston also has some major implications for the financial markets.

In the end, curiously, the markets had a steady climb this week, rising almost 2% in the US and almost 1% for the other global markets.  What gives?

Harvey

Obviously, Harvey has dominated the headlines.  The hurricane pummeled Houston, putting it under several feet of water.  It has been a human tragedy that we have all seen on television, but in a way it’s oddly encouraging.

Houston is the 4^th largest city in the country and it has just suffered a massive body blow.  As bad as it is: 1) There is no doubt that Houston will recover and after a bit of time (probably much less than most would expect) the city will be back to normal.  2) The rest of the country has been cranking along just fine.

From a financial and investing perspective, that means we’ll feel a bit of a blip as Houston gets knocked down and then gets back to it’s feet, but it should be short and shallow, and then after not too long it will be like it never happened.  That’s truly a testament to the amazing diversity and robustness of our economy.

 

Gas prices go up

Outside of Houston, the rest of us are feeling Harvey’s impact at the pump.  About 20% of all gasoline is refined in the area impacted by the hurricane.  Here in Greensboro, that has caused gas prices to jump from about $2.19 to $2.59.

This won’t last very long, as those refineries are going to be back online soon, but in the meantime, it will have an impact.  This is a bit of a bummer, because the extra we are all paying for gas really isn’t going to anyone.  People aren’t getting higher profits that they can spend or anything like that.  One way to think of it is that extra money it’s being “swallowed up” by the closed refineries.

That’s what economists call a dead-weight loss, and it’s never good.  Fortunately, it will be over soon.

 

Chemical plants blow up

Harvey’s destruction has obviously caused a lot of damage, in homes and businesses.  The one that has hit the news is the peroxide plant which lost power and then blew up.  Obviously that one instance is going to cost millions of dollars to repair.

The total tab for Harvey’s destruction is expected to come in at about $190 billion.  That’s a tremendous amount of money, about the total GDP of an entire country like Greece.  However, for the US that’s a bit of a drop in the bucket.  That will come to about 1% of our nation’s GDP.  One way to think of it is that every American will need to pony up about 1% this year to pay for Harvey’s damage.  That’s a lot but definitely doable.

 

US revising GDP growth upwards

With all that damage from Harvey, how are stocks up so much?

The economy is strong, innovation is happening, and things are just plugging along.  In fact, the economy just clocked in a 3% growth rate.  In the past several years it has been pretty volatile but averaging more in the 2% range.

If this 3% growth becomes sustainable that’s a huge deal.  That extra 1% pays for Harvey’s damage by itself.  That extra 1% is a will really turbo boost the stock market.  I think the optimism for that is keeping things at record levels.

 

So there you have it.  With the dominate story being bad news, stocks were up, and that’s really a testament to how strong things are for the stock market right now.

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

 

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

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

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

 

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

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

 

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

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

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

 

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

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

 

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

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

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

 

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

Squirt and Stocky 6 years ago, back when we still lived in Chicago.

 

I write a lot about investing on this blog with the purpose of helping you achieve your financial goals.  Of course, “financial goals” is a fancy way of saying make more money with your investments.  Isn’t that what we want after all?  To make more money so we can have a comfortable life, have a secure retirement, pay for our kids’ educations, support the charities that are important to us.

But it’s a long road, and it can be easy to lose sight of those goals.  Sometimes all your hard work, your thrift, and your smart investing just become numbers on a bank statement.  Well, I want to share with you a story of how smart investing allowed us to make a really good decision that our family benefits from each and every single day.

 

The dreaded “C”

Our family has been blessed with two amazing little boys, but before Lil’ Fox and Mini Fox joined us, we had Squirt, our impetuous Staffordshire Bull Terrier.  Squirt is getting up there in years, last May she turned 14, so we know that at some point she’ll go to heaven (actually, probably not because she isn’t a well behaved dog, but you get my meaning).

About six months ago a bump started growing on her side.  It got progressively bigger, but we figured that she was old and that’s what happened to older dogs.  But then it started oozing gross stuff, and we knew we had to get it checked out.  They did a biopsy and gave us the terrible news that the tumor was malignant, and an aggressive one at that.  Fortunately, we did have options, namely surgery.

Now I don’t want to lose perspective on these things in a world where humans suffer from cancer and other diseases, but we were pretty devastated.  Squirt was our baby before we had babies.  She was there when we were married, moved into our new house in LA with us, welcomed home both boys.  In particular she’s really great with the boys despite the abuse they dish out.  I guess they have an understanding—she steals their food if they aren’t careful and they can lay on her if they’re tired (Mini Fox has taken to gumming her tail).

We took her into the veterinary surgery center where they checked her out.  They said that they would have to do a pretty major surgery to remove two masses, but they felt there was a pretty good prognosis. That was great news!!!  Oh, and the bill would be about $5000.  That was less than great news.

 

Thank you, smart investing

Foxy Lady and I talked about it for a long time.  What should we do?  What would you do?  Squirt was 14 years old and she had lived a great life.  Was this her time to shuffle off this mortal coil?  Should we let her bow out gracefully on her own terms, instead of putting her through a painful surgery?  It was a really tough decision for us.  Again, we appreciate that we’re talking about a dog, and a 14-year-old dog at that, but she’s our baby.

And then there was the cost–$5000.  That was a lot of money.  That is a lot of money.  On the cusp of me quitting my job and us becoming a single-income family, that was really a lot of money.  Of course, we didn’t want to make a decision about the life and death of our dog based on money, but you have to factor that in.  She was 14 and had cancer.  Did it make sense to spend that much money?

However, we started thinking about it and while $5000 is unquestionably a big number, in some ways it’s not.  Allow me to explain.  On this blog, we talk about all the ways that you can get higher returns by being smart with taxes, using low-cost mutual funds, and being smart with asset allocation.  $5000 is six months of using an index mutual fund instead of an actively managed one; it’s three months of doing investing ourselves instead of hiring a professional; it’s a year’s tax advantage of using a 401k.

When we put the cost of Squirt’s surgery in that perspective, that we’d make that up in a few months by doing a few simple things with our investments, it became a lot more palatable.  We were able to be comfortable with the cost of the surgery, or at least play mind games with ourselves to justify it in our head, and then just made our decision based on what was best for Squirt.  As you probably guessed, we went ahead with the surgery.

I share this story because this is a tangible way that investing wisely has impacted our lives in the here and now.  I couldn’t imagine having to make a decision on Squirt’s life if I was thinking in the back of my mind, “Can we really afford this?”  Smart investing generates more money, but that’s a means to an end.  What it really gives you is freedom and comfort and security, and in our case wet kisses.

 

Recovery

So we had the surgery.  The timing couldn’t have been worse.  All this was happening in the midst of my leaving Medtronic and then us moving to North Carolina.  Two weeks after her surgery we took Squirt on a 2500-mile road trip just to make an already challenging situation more difficult.

Two months after surgery and she’s doing great.  They biopsied the mass they removed and said that there were no cancer cells along the margins, so that means it wasn’t spreading.  Great news!!!  She’s adjusting to her new home.  She has found the little nooks where she likes to take naps and the strategic spot between where the boys eat to maximize the amount of fallen food she can pounce on.  There are a ton of trails that she can walk along and several creeks and streams that she can wade through.  Her wheels aren’t what they once were, but she can still chase that tennis ball like a champ.  The boys had no idea of what was going on, but what they do know is that their dog is there to play with, lay on, pet, and yell at when a cheese stick theft has occurred.

 Please share this if you believe that Project Runway should celebrate women of all shapes and sizes and ages.  My hope is enough people share this that it ultimately gets to Heidi Klum and the people at Lifetime Television.  Maybe if they know their fans and viewers want to see a variety of women models, they’ll make the change.  I hope you join me in this.

 

If you ever want to know where to find Foxy Lady and me on Thursday nights, it’s in front of the television watching our favorite show, Project Runway.  We have been longtime devotees; we started watching the show together during its 4^th season when we were dating in Chicago.

She loves it for the fashion.  I am man enough to admit I love it too, mostly to see the creative process take shape.  So there you go, a Project Runway lovefest.

But there is something that has always bugged me—Project Runway still exclusively uses “model-sized” models for all its runway shows.  They’re all your stereotypical model—early 20s, 5’10”-ish and 110-ish pounds, stick-thin with super-long legs.  Of course we know that isn’t the real world.  You take 1000 women off the street and maybe 2 look like that.  The other 998?  They’re thin and short, chubby and short-waisted, tall and muscular, big-busted, big-butted, and a hundred other shapes.  Why doesn’t Project Runway let these women also be the muses for its designers?

Granted, in one or two episodes a season, they do use non-model-sized models, but those shows tend to be gimmicks.  Last season in episode 13.9 they designed clothes for kids and in the following episode (13.10) they picked models up off the street, although I must confess I don’t remember a huge diversity in the shapes and sizes of those women.  But all the other episodes use exclusively super-young,  super-tall, super-thin models.

The season before that in episode 12.10 the designers created outfits for Project Runway superfans (sadly, I was not included among the group), and there you saw women with a lot of different shapes and sizes.  All the other episodes: you guessed it, super-young and super-tall and super-thin.

I could go on and on.  Suffice it to say, in any given season there are about 15 episodes and one or two of them use models that deviate from the super-young, super-tall, super-thin look.

Call to action

So here is my call to action for Lifetime and Heidi Klum.  Start using models that represent the diversity of the women in this country.

Sure, there are probably excuses that the show could use, but they’re all pretty weak:

The designers are used to working with super-young, super-tall, super-thin models:  This actually comes up a lot in those episodes where they do use normal-sized women.  The designers complain that they don’t know how to size their garment for a woman with big boobs or a big butt (Carlos from season 8 shared these sentiments to nice comic effect).  My answer—tough cookies.  Learn to make clothes for these women, after all if you want to be a successful designer, you’re going to need to.  I guarantee you that Michael Kors or Brooks Brothers (two design houses that have strong ties to Project Runway) sell more clothes that are larger than size 4 than are smaller.

It wouldn’t be fair if some designers got different sized models—the models need to be “standardized”:  I can see the logic here, but it’s something where you can either accept the excuse or not.  I choose to not accept it.  Women of any shape can be beautiful.  One of the designers’ jobs is to create the garments that bring out that beauty.  Some will need to accentuate the butt while others need to downplay it, same for the bust or the wide hips or the thick ribcage.  But isn’t that part of the challenge?

The supply of different-sized models just isn’t there:  Bullshit.  They do the shows in New York City.  If they did a casting call for models of all shapes and sizes, they would get tons (literally and figuratively) of women.

They need professional models:  Somewhat related to the above comment.  In the episodes where they have different-sized models they tend to be gimmicks (fellow designers, dog owners, designers’ mothers or sisters, superfans, women off the street, etc.) so they aren’t using professional models.  It becomes frustrating for the designers because the models start complaining about stupid stuff or start giving their opinions when it isn’t appropriate. A good example of this was in the fourth season when Christian Siriano (the eventual winner) made a prom dress for a highly opinionated and difficult high school girl (episode 4.7).    I get the frustration, and I get that you need a professional model who can keep her mouth shut, wear the clothes, strut down the runway, and highlight the garment’s best qualities.  Here’s a solution—hire professional models who are different sized.  There are thousands of them out there if you’re just willing to look.

 

As I said at the beginning, Foxy Lady and I are huge Project Runway fans.  And we aren’t alone—Project Runway averages about 2 million viewers per episode.  With great power comes great responsibility.  

Project Runway is uniquely positioned to make a real difference in the fashion industry and maybe society at large.  They can continue to nearly exclusively use super-young, super-tall, super-thin models.  That perpetuates the travesty that that is normal, leading to all sorts of problems especially for girls and young women like low self-esteem and eating disorders.

Or they can pick up the gauntlet and show that women of all sizes can be models, women of all sizes can be beautiful, women of all sizes can strut their stuff.  If it stopped there, I think it would make really interesting viewing.  The designers would be faced with an additional dimension of challenge and the runway shows would be a lot more entertaining.

But the real upside is maybe that could impact the whole fashion industry.  In a single week more people tune into Project Runway than attend all the fashion shows during fashion week.  If they can show that there is an audience for different-sized models, and even more importantly a market for them (afterall, fashion is a business), maybe that will convince Ralph Lauren or Dolce & Gabbana or Vera Wang to follow suit (literally and figuratively).  I hope they do.

 

If you agree please share this and let’s see if we can get it to Heidi Klum and Lifetime Television.

Loyal Stocky Fox readers, I know I tested your patience by taking a prolonged break, but I’m back.  I’m a big believer in using excuses, and I have a few good ones for why I wasn’t able to write any posts for the past two months.  Actually, we’ve had some major life changes and are just starting to see the light at the end of the tunnel.

 

I’m retired!!!

Probably the single biggest change is that I quit my real job and am now entering the ranks of the unemployed, stay-at-home foxes, mid-life crisis ranks of the country.  About a year-and-a-half ago, when we found out we were pregnant with our second cub, Foxy Lady and I really started talking about life and what we wanted.  Fortunately, because a lot of the smart investing we had been doing, much of which I have chronicled in this blog, we had a nice little nestegg that gave us some real options.  After a ton of discussion we decided that I would become a stay-at-home fox.

It took a while to sort everything out with work and to make sure we landed as softly as possible.  After taking advantage of California’s very generous paternity leave program, Medtronic and I parted ways after 16 years (I started there as a 21-year-old wide-eyed cub—crazy).  As an aside, I think Medtronic is a fantastic company and am so thankful that I spent so much of my career with them.  Financially, they are wonderful and have so many programs that allow their employees to build a secure financial situation.

And now I am done with working.  I won’t have a boss anymore . . . actually, I guess I have two bosses: Lil’ Fox and Mini Fox, but they’re pretty cool.  Obviously, when you change careers or even end your career, that has a ton of impact on your finances so you can expect a lot of posts on us going through this transition.

 

We moved

This is a big deal (but not so big a deal as me retiring since that had three exclamation points).  After Foxy Lady and I decided that I was going to bow out of the game, there wasn’t nearly as strong a tie living in Southern California, so she started looking for opportunities across the country (SoCal isn’t a very good market for her industry).

With that freedom of location, she found an amazing position in Greensboro, North Carolina, with VF Corporation (they own clothing brands like The North Face, Timberland, Vans, Jansport, Lee Jeans, Wrangler, and many more).  It was an awesome opportunity for her—a nice promotion, more money, and a move into the fashion industry which she’s totally passionate about.

If you’ve ever moved, you know that it’s a crazy time in general.  With two little kids and a 14-year-old dog, it’s just insane.  We’re about two months into the craziness and probably have another month to go before we are completely settled in our new home with all our furniture.  It’s been a wild ride and one I’ll certainly be glad to put behind me.

Just like with retiring, when you move there are a ton of decisions that you have to make that have a ton of financial implications.  Getting these right can result in tens or hundreds of thousands of dollars over the years, so you can be assured that I’ll use the move as fodder for plenty of posts as well.

 

So there you go.  That’s what’s been happening on our side.  Thanks for sticking with me and look forward to some kickin’ posts coming down the pike.  Tomorrow I’ll post on the Top 5 financial blunders people make by following their instincts.

Loyal readers,

 

As some of you may know, Foxy Lady and I are picking up the family and relocating them from California to North Carolina.  We’re super excited about the move and it’s a great opportunity for us.  However, if you’ve ever moved, you know there are a ton of things you need to do.

That’s the rub.  So I am going to take a bit of a break from writing posts to focus on the move and getting to little cubs moved 2500 miles.  I should be back in a couple weeks so check in every once in a while.

Until then, see you on the flip side.

What do you think of Cracker Barrel’s stock (CBRL)?  I heard that aside from the food they sell each store sells something like $1 million in merchandise.  Should I buy some?

— Doug from Detroit, Michigan

As a rule, I don’t invest in individual stocks because it seems like a lot of work to figure out which ones will make good investments.  Instead I just invest in index mutual funds using dollar cost averaging, and that works well for us.

That said, if you look at Cracker Barrel there are a lot of reasons to like it as an investment.  Over the past year it’s up about 40%–that is either a bad thing because maybe you missed out on the upside, or it could be a good thing because the stock is doing well and there’s no reason to think it won’t continue to.  Who knows on that one?

If you look at the price to earnings ratio (P/E), it’s at 23 which means you’re paying $23 for each dollar of earnings Cracker Barrel makes.  That’s definitely on the high side, so that might be another reason to be cautious.

Finally, if you look at the dividend, the stocks pays $4 per year which is about a 2.6% yield.  That’s really good compared to most stocks.  So in addition to enjoying any price appreciation that might happen, you’ll also be getting a yield higher than a 10-year US bond.  Of course, Cracker Barrel might lower the dividend, so you need to beware.

Put that all together, and your answer is a firm “I’m not really sure”.  There are a lot of things to like about Cracker Barrel, but you don’t really know if you missed the boat.  In general I always recommend investing your money, be it in index mutual funds (my first preference) but if you want to pick individual stocks, Cracker Barrel seems just as good as any stock.

 

 

What do you think about the Fed’s policies and how a strong dollar will affect the U.S. economy and your investments?

— Andrey from Barcelona, Spain

This has been getting a ton of news lately.  I personally think it’s a good thing that interest rates will rise to more normal levels (we’re at almost 0% which is not a sustainable long-term level for interest rates).

The dollar has been strengthening a lot lately because many other countries are having economic problems.  Europe is hampered by Greece (and potentially Spain and Italy) debt issues, Japan remains in a funk, China is slowing down, etc.  The US economy is growing and inflation is low, so that makes the it a really attractive place to be, financially speaking.  And that has the effect of the dollar increasing in value.

There’s always the concern that if your currency strengthens, then that will hurt your exports, and thus hurt your economy.  This leads to the weird paradox that as your economy strengthens it leads to weakness.  Maybe the stronger dollar will hurt imports some, but I think that will have a pretty negligible effect (remember that compared to domestic consumption, US exports are much smaller).

From an investing perspective, I think things will be fine.  If your economy is strong and inflation is low, that’s generally a great formula for investments.  The Fox family is fully invested in the market right now.

The day they announce interest rates are going up, stocks will probably fall a lot.  But after that, people will start to get the concept that interest rates rose because things were looking so positive.

 

 

I have read several articles recently and they all talk about gold and diamonds. The price of gold and diamonds is bound to go up because the resource is limited. Stocky Fox, is it a good investment to buy gold via my bank?

— Harold from New York City, New York

In general, commodities like gold don’t tend to be a very good investment.  Certainly over short periods of time, gold and other precious metals might do really well.  But over the long-term, compared to stocks and bonds, commodities end up really underperforming stocks.  Remember the difference—with stocks you’re giving money to a company so it can build a business that earns money, but with gold you’re just holding money in a bank that doesn’t do anything.

That said, gold is a good store of value, especially in uncertain times.  In 2008 when the world thought the global financial system might collapse, gold did really well.  In that way, I look at gold as a little bit of “insurance” for my portfolio.  You want most of your portfolio in stocks and bonds that should produce returns, but maybe you keep a little bit in commodities as insurance in case the world goes to hell.  The Fox family has about 5% of our portfolio in commodities.

 

A lot of people, especially in Moscow, are living off renting apartments that they got as an inheritance from their relatives. If you get an apartment from your grandma or aunt, getting $2000 to $4000 out of it each month is a sweet deal.  Should I buy apartments in order to rent them out when I retire? How good is that investment?

— Ivan from Moscow, Russia

I had a post on rental properties.  Overall, I think they make a lot of sense, so long as you can avoid the nightmare scenarios of having bad tenants.  Given you’re in Russia where it’s more difficult to invest in stocks, that makes rental properties all the more attractive.

Like all investments, rental properties are only so good at the deal you get.  If you pay a too much for the apartment it won’t be a good deal.  If you can buy an apartment at a low price, then you’ll make out pretty well.  As a rule of thumb, I would divide the annual rent by the cost of the apartment.  If that is 8% or more, it’s probably a pretty good deal.

 

 

What do you think about investment firms like Betterment or Wealthfront?

— Noah from Chicago, Illinois

I think they make a lot of sense (Wealthfront is connected to mint.com and I use Mint, so I am barraged with pop-up ads from Wealthfront).  My basic understanding is that they have taken investing and automated it using fancy-smanchy algorithms.

They invest your money in index mutual funds (just based on that, I’m a fan) and they have a pretty user-friendly interface so you can select the risk you want, diversification, etc.  Then they automatically invest your money in the appropriate index mutual funds based on your choices.

The problem I have is that they charge you about 0.25% for all of this.  That doesn’t seem like a lot ($250 annually for a $100,000 portfolio), but as we’ve said many times, that adds up.  Over an investor’s career, that 0.25% could come to tens or hundreds of thousands of dollars.  I personally feel that most people can do everything that Betterment or Wealthfront does on their own with Vanguard.

The only really innovative strategy that I noticed was that they do which might not be super-easy for an individual to do is “tax loss optimization”.  Basically that means selling investments at a loss to offset the taxes you would owe on investment gains.  But over the long-term, aren’t you supposed to have many more gains than loses?  So I don’t think that will add a ton of value over the long run.

If you just want something simple, these sites might be really good and probably worth the money.  However, I also think that what they do most people could easily do for themselves with a few hours of work per year.

 

 

Now that consumer electronics are so cheap, are they a good investment?

— Ally from Serbia

Consumer electronics are almost never a good investment for the very reason that they are so cheap and they become obsolete so quickly.  One of the major problems I think you’d have is reselling them for a profit after you bought them.

Maybe you know a lot of people that would buy that stuff, but then that starts to sound a lot more like a job than an investment.  But I would definitely avoid “investing” in consumer electronics.

 

 

I do not trust banks. I would rather keep my money in US dollars at my home. Is that a good investment? After all  if I have $10K at my place and there is really low chance of apartment robberies in Moscow, I will have the same amount of money in 10 years, right?

— Katya from Moscow, Russia

The problem with keeping cash at home (other than robberies which you mentioned) is that you aren’t earning anything with the money.  Remember that using historical averages stocks return about 6-8% annually.  If you just hold cash, you’re missing out on that.  Also, when you hold cash, inflation eats away at the value of those dollars.  Over the past decade US inflation has been about 2%, so you’re losing that as well.

The answer to your question is: No, after 10 years your $10,000 will lose value because of inflation.  The solution is to invest it in stocks or bonds.  Those will “earn” money on your savings and especially with stocks those will generally keep up with inflation.

 

A lot of my girlfriends are doing Botox now. Should I invest in Allergan?

— Anita from Paris, France

You must run around with a young-looking group of women, but maybe you can’t always read their facial expressions.  This is an approach that Peter Lynch (one of the most successful investors of all time) talks about in his book One Up on Wall Street, namely invest in companies who make products that you like in your everyday  life.

Allergan is a great company whose stock has been on fire lately.  In the past year it’s up over 80%.  That begs the question: Did you miss out on the upside with this company.  As always, my answer is who knows?  Like I told Doug regarding Cracker Barrel, you never know with individual stocks.

That said, great companies are those that make great products that people like.  You’re experience tells you that Botox is a great product that people really like.  So it makes a lot of sense that you’d invest in the company.  It’s a bummer you didn’t do this a year or two ago, but isn’t that always the way?

 

What do you think about the financial advice from Cosmo to put aside 10-15% of all my income? Or making notes of all my expenses?

— Elizabeth from Houston, TX

Those seem to be really good starts to investing.  As I mentioned in this post, the first step in investing is saving money.  10-15% is a great start depending on your age.

Also, tracking your expenses is another great step when you want to get your financial house in order.  There’s a common saying in business that goes: “if you don’t track it, it doesn’t change.”  When  people first start tracking their expenses, I think it’s a real eye-opener when they see where their money is going (“I am seriously spending $180 per month at Starbucks?”).  Once you see where your money is going you can start to decide if those expenses are worth it or not.

As I first step, I would suggest a website like www.mint.com.  It’s a free website that tracks your credit card spending and then put some decent reports together so you can start to look at your trends.  Plus, it’s free!!!  Maybe you set up your accounts on Mint and then spend normal for three months.  After that, take a look at what you’ve been doing and decide if you should make changes.

All that said, congratulations for taking the first step.

 

As you might imagine, I talk to a lot of people about what they’re doing with their investments.  One of the things I hear a lot is, “I’d like to start investing, but before I do that, I need to build up my emergency fund.”  That sounds pretty prudent.  You don’t want to get caught in the lurch when life throws a curve ball at you.  Yet, I actually think this is a really bad move.  I freely admit that the Fox family does not have an emergency fund.  We have investments, and if the unforeseen happens that’s what we’ll use.

 

How likely is an emergency?

What are the types of things that you’d use an emergency fund for?  Almost by definition, an emergency is something that is unpredictable and somewhat rare.  If your 12-year-old Honda Civic is starting to die and you know in the next couple years you need to get a new one, that isn’t really an emergency as much as something you need to budget for (that was the exact circumstance of the Fox family two years ago).  If you’re having an “emergency” every year, either you’re the unluckiest of people, or probably  more likely you just have a lifestyle that needs to be budgeted a little differently.

When I think of things that you’d spend an emergency fund on it’s stuff like: your hot water heater gives out, you’re 7-year car gets totaled and insurance only gives you $6000 to get a new one, your son goes into the NICU for four days because of croup and your portion of the bill is $4000 (as happened with Lil’ Fox last year), or you are fired from your job.

As I was writing this post, I asked Foxy Lady if she could remember any emergencies that we have faced since we were married 5 years ago.  The hospital thing with Lil’ Fox was the only one we came up with.  There were smaller things like when we had to replace the dishwasher ($500) or fix the clothes dryer ($400), or fly back to Michigan for a funeral ($400), but the hospital thing was the only major one (I’m defining “major” as more than $1000).  So that means we have averaged one emergency every five years.  Once every five years—I don’t know if we’re more or less prone to emergencies than the general population, but that seems about right.

So let’s use that as an average—you have about a 20% chance in any given year of needing to tap into your emergency fund.  We’ll use that in a second.

 

How likely is it you’ll make money in the stock market?

Obviously we put a huge caveat on this, but we can look at historical performance to get a sense for how likely it is that you’ll make money or lose money if you invest your emergency fund in stocks.  Actually, we kind of did this in a post a while back.

Remember that historically, if you have a one-year investment time horizon, you make money with stocks about 70% of the time.  That is actually pretty good odds that investing your emergency fund in stocks would have you come out ahead, just looking at it for one year.  In fact, we can do the math, and the chances of you having an emergency in a given year and losing money in the market are about 6% (20% chance you’ll have an emergency x 30% chance you’ll lose money in the market that year).

But remember, emergencies don’t happen every year—they tend to be much less frequent than that.  For the Fox family, they happen on average once every five years.  Just for the fun of it I put a table together that estimated the chances of having an emergency if you assume in any given years there’s a 20% chance of having one.  Also, I looked at the historic data to see the probability that you would have lost money in the market over different time horizons.

Time horizon	Chance of an emergency	Chance of losing money in stock market*	Chance of emergency and losing money
1 year	20%	28%	6%
2 years	36%	24%	9%
3 years	49%	18%	9%
5 years	67%	13%	9%
10 years	89%	3%	3%

 

As we mentioned above, there’s a 6% chance that in any given year you would need to tap your emergency fund when the market was down.  Looking at other time frames you get similar results.  Pretty much any time frame has a less than 10% chance of you needing that emergency money at a time that you would have lost money in the market*.  You need to decide if you’re willing to take that risk, but to me that seems like a no-brainer.  If I have a 90%+ chance of coming out ahead on something, I’m doing it.

You can see where I’m going with this.  First, emergencies don’t happen all that often (if they do, you probably need to come up with another name for them other than “emergency”).  Second, if you give yourself a few years in the stock market, the probability of losing money goes down a lot (of course, it never goes to zero).  That seems like a perfect combination for investing your emergency fund the same way you invest any of your other money.  $10,000 invested in stocks with an average return of 6% would give you about $13,300 after five years; keeping that same amount if your savings account at today’s interest rates would give you about $10,050.  Seriously, that’s ridiculous.

I get that many people look at that and say, “the whole point of an emergency fund is you never know when you’ll need it, so don’t put the money somewhere where you might lose it.”  That’s a very understandable concern, but it’s also where a lot of people are leaving a ton of money on the table.  Over the past 150 years, investing in stocks has a really good track record, and the more time you give it, the better that track record becomes.  You’ll never eliminate all the risk from investing, whether it’s your 401k or US bonds or the cash in your checking account, there will always be some type of risk.

It’s the successful investors who understand that risk and understand how to decrease the risk (expanding that time horizon to five years cuts in half the likelihood of losing money), that are able to get the most bang for their buck.  This is definitely one of those areas where you can get a 1% coupon.

 

The Fox family eats on our cooking on this one.  We don’t have an emergency fund.  When emergencies do happen like with Lil’ Fox, we pay for it out of our investments, absolutely believing that over our lifetimes there may be one or two instances where we lose money but there will be many, many more where we come out ahead.

 

Let me know what you think.  Do you have an emergency fund?  Do you think I’m crazy not to have one?

*I used the same methodology for this table that I did for my post “Will you lose money with stocks?”