The Stocky Fox – Page 16 – Getting fat off investments

Top 5—Financial moves when the stork is coming

November 4, 2015November 1, 2015 Stocky 2 Comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Getting a mortgage when you could buy the house outright

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

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

Super low rates

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

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

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

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

Good time to be an investor

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

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

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

Company relocation

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

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

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

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

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

Life insurance (part 2)

October 28, 2015October 28, 2015 Stocky 2 Comments

On Monday I posted part 1 which covered how we started thinking about life insurance and came to the decision to get it after two little cubs joined our lives. To read that click here.

Once we decided that we wanted to get life insurance, and had a rough idea of what we wanted it to accomplish (Foxy Lady needed a bridge until she found another partner, I needed something to allow me to raise the boys on a single income), we actually had to go out and do it. When thinking about life insurance, the first thing you need to do is decide between the two major types (I’m not an expert here, and I know there are a lot of nuisances, but this is my general understanding; any readers who can shed a little more light, please do so)—whole life insurance and term life insurance.

Whole versus term

With term life insurance, basically you’re signing up for a limited period of time (10-year or 20-year policies are common) to have life insurance and then when the “term” is up your policy expires. If you’re lucky and you outlive that 10 or 20 years, your policy is done and worthless (but you’re lucky because you’re alive, right?). Prices obviously vary quite a bit, but if you’re young and healthy, this type of insurance is very inexpensive—Foxy Lady and I each have a 10-year term policy for $1.5 million and we pay $50 per month for it.

A whole life policy is very different in that it lasts until you die. So with the term policy, after the term (in our case 10 years) is done, the policy is done; with whole life, so long as you keep paying those monthly premiums, the policy will last as long as you do, if you live another five years or another 55 years. Whole life policies are much more expensive (when I was shopping for this stuff, a $1.5 million whole life policy for me would have been about $1300 per month), but that kind of makes sense.

With term policies, especially when you’re younger like Foxy Lady and I are, the chances of us actually using the policy are very low. The probability of us dying in the next 10 years is about 2%. So the insurance company is really counting on us having that 10 year policy, paying our premiums every month, and then after 10 years they pocket all the money and we don’t see a dime. Of course, it’s worth it to us because there’s always that small chance that the nightmare scenario happens, and that’s what insurance is for.

But with a whole policy, there is a 100% chance that you’ll get your money because there’s a 100% chance that you’ll die eventually. That’s what makes it so much more expensive than term policies. If I bought that $1.5 million policy for $1300, in a way I am just socking away savings into a life insurance policy that will go to Foxy Lady when I die. It’s guaranteed that she’ll get that money. In this way, whole life insurance policies have a bit of an “investment” feature the same way an IRA might have.

Which one did we pick?

As I mentioned earlier, Foxy Lady and I picked 10-year term policies, and here is why. First, we decided for term life insurance instead of whole life insurance because I think you can actually do a lot better investing your savings in things like a 401k, IRA, or brokerage account than with a whole life insurance policy. Remember, we each would be paying about $1200 more per month for whole rather than term life insurance. That’s a lot of money, and if you do back of the envelop calculations, if you invested $1200 per month, it would only take you about 30-35 years to get to $1.5 million. I was 36 at the time we got life insurance so if I had to take the over/under on if I’d make it another 30-35 years, I’d probably take the over (statistically there’s over an 80% chance that I’ll live another 30 years).

Once we decided on term life insurance, we had to pick the “term”. Should we go on the short end like 10 years, 20 years, or really extend it out to something like a 30-year- term? At 10 years, our premium is $50 per month; had we taken a 20-year term the premium shot up to something like $125 per month, and at 30 years it was something like $700 per month. On the surface it may seem counterintuitive that the longer you have a policy the more expensive it gets, but it starts to make sense if you think about it. The chances of us dying in the next 10 years is pretty low, about 2%; but over the next 20 years it’s about 6% and over the next 30 years something like 18% (it surprised me it was that low, I expected it to be a lot worse). So the longer you make the term the more a term policy starts to “look and act” like a whole life policy.

This is a point Foxy Lady and I talked about a lot. We decided on a 10-year term policy because it was the least expensive, and that’s always a good thing. But then we also thought about what our financial situation would be like in 10 years when the policy expired. At the time we had one little cub, ‘Lil Fox who was two years old at the time, and we were expecting our second, Mini Fox. When a 30 year policy would expire they would be well into adulthood, out of the house, and on with their lives (hopefully). So after 30 years, Foxy Lady and I would be in a similar situation to where we were before we had kids. Remember that it was only having little kids and the responsibility of taking care of them if something happened to one of us that prompted us to get life insurance in the first place. So a 30-year policy was out.

Then it came down between picking a 20-year policy or a 10-year policy. The 20 year option was attractive because it basically saw us through the boys’ childhoods; after 20 years ‘Lil Fox would be finishing up college and Mini Fox would be starting college (by that time we should be free and clear since we are saving for their educations). With the 10 year option they would be about halfway through their childhood, so that seemed to tip the balance in favor of the 20-year option.

But then we started thinking about our financial situation in 10 years and what that would look like if the doomsday scenario happened—we got a 10 year policy and then one of us died in year 11. I suppose the uber-doomsday is both of us die after 11 years—are you kidding me, how can I even think about something so horrible (do you see what I mean? Thinking about life insurance sucks). We’re diligent savers, having built a nice little nestegg when both of us were working, still maxing out our 401k accounts, and building up equity in our home. After 10 years based on some simple projections, we hope to have a net worth of $4-5 million. Looking back on that doomsday scenario but knowing we have a $4-5 million backstop, we felt okay about things.

If you remember, Foxy Lady would replace me (with a guy who hopefully had an income) while my body was still warm so she would have more than enough money to see her through. I would want to raise the boys without marrying again, so the stakes are a little higher for me, but even then I would be fine. So as we thought about it, we really only needed life insurance to get us through a few years while we built our net worth up. Once we got to $4-5 million, if tragedy struck, financially we knew those we left behind would be okay.

So that’s how we settled on a 10-year term life insurance policy.

How much insurance to get?

Once we knew we wanted a term policy and once we knew we wanted it to be for 10 years, the last thing we had to do was figure out how much life insurance to get. This is probably the most important part because it’s what you’ll get if tragedy strikes, but in a weird way it was the easiest decision in the process.

A lot of places have life insurance calculators. You put in information for your current situation like how much you currently make, do you have a mortgage, how many kids do you have, etc. And it spits out a number for how much insurance you should get. As you can imagine, since these are on the insurance companies’ websites, they tend to give you really high numbers. When we did our research, it was telling us that we should each get something really high like $2 or even $3 million policies. On the surface that seemed really high. When Foxy Lady and I thought about those numbers (again, imagining life without the other—good times), they seemed more than enough.

The good news was that the insurance wasn’t all that expensive. A $1 million policy was about $35 for each of us (Foxy’s was a little lower since she’s a woman and 18 months younger). For $1.5 million it was $50, and for $2 million it was $70 per month. $1 million seemed like plenty for us but since getting a little more didn’t seem all that much more expensive, we ultimately decided to go with a bit of a middle-ground option and settled on $1.5 million for each of us. True to form for a sales guy, the dude we bought the policy from tried to upsell us to $2 million and gave us all sorts of reasons why people in our situations really needed the additional coverage. Gotta love sales people.

Dang, this has been two long posts on life insurance. Fortunately for Foxy Lady and me at this point, it’s all set up and we do the automatic withdraw every month and we don’t think about it. But I can tell you when we went through it, it was a very difficult process, imagining losing the loves of our lives and imagining moving forward with our boys but without our partner. It sucked. But it was something we felt we needed to do for the little guys. I’m convinced we’ll out live our 10-year policies and never use them, so in that way it seems like a total waste. But the very nature of insurance is you use it when that one-in-a-million tragedy happens. So we have our bases covered.

I hope this glimpse into one of the harder financial decisions Foxy Lady and I had to make was helpful. What about you? How do you look at life insurance?

Life insurance (part 1)

October 26, 2015October 24, 2015 Stocky 3 Comments

I started writing this and found that the post became enormous. So here is part 1 of the life insurance post. Tomorrow I will have part 2.

If you ever want to have a really uncomfortable conversation with your significant other, start talking about life insurance and what makes sense for the two of you. Of course, life insurance is an important element of financial security for many (but certainly not all) of us, so it’s a conversation you need to have, but it’s a really morbid one. Plus, you’ll find out what type of life your spouse would want after you’re pushing daises which is kind of weird in its own right.

For Foxy Lady and me, we certainly didn’t think about life insurance before we got married, and really didn’t give it a lot of consideration until we had the little guys. As a single person, I don’t really think life insurance makes sense—if you die your family and friends will be sad, but you really aren’t leaving anyone in the financial “lurch”. Your funeral and final expenses might cost a few thousand dollars, but that’s really it. Your 401k and other assets should more than cover that.

Once you get married (or act like you’re married, such as living together and sharing expenses), but before you have kids, the equation starts to change. If both of you are working, you’re going to gravitate to a dual-income lifestyle. If one of you unexpectedly died it would be a sad event, and now the surviving spouse would have to cope with life on a single income instead of the double income. Maybe that’s a big deal, and maybe it isn’t. This is important especially if the surviving spouse was making less money than the one who died. This is a bit of a judgment call.

For Foxy Lady and me, when we were at this stage of our lives we had the attitude that the surviving spouse would keep working and just kind of continue life like before we were married. Again, it would be very tragic and I don’t mean to diminish that. Foxy Lady is the love of my life and my life partner, and if anything happened to her, emotionally I would be crushed. But from a financial perspective, before we had kids, I would have been fine, so it wasn’t something that justified us getting life insurance.

And then the kids came, and this is where the equation really changed for us. Now if one of us passed away, we wouldn’t just be leaving the grieving spouse to take care of him/herself, but we’d be leaving two little guys whose employment prospects wouldn’t be all that good for at least a couple decades. All joking aside, losing a spouse sans kids would be a bump in the road financially, but one we could probably overcome. After all, we had jobs and supported ourselves before we got married so why couldn’t we do it again? But with kids, your expenses are higher and there’s just a greater sense of responsibility for those you’re leaving behind. At least that’s how we felt. So after we had Lil’ Fox we got life insurance.

What do you want life insurance to do for you?

The first thing you need to do is figure out what you want life insurance to accomplish; this is where you start having those uncomfortable conversations with your spouse about what they’d do after you died. I figured that Foxy Lady would mourn my loss, wearing all black and lamenting her widowhood until she joined me in heaven. She surprised me when she said that she’d move on. After putting some serious thought into it, she said she would want to remarry so the boys would have a father figure. For her, life insurance would serve as a bridge between my death and her moving on with her life. Assuming that she married a good guy with a decent job (see how it gets uncomfortable? I’m starting to think about the guy she’ll be with after I’m dead), she’d be fine after a few years.

For me it was different. I grew up with a stepmother and know firsthand how challenging that type of relationship can be, for both the adults and the children. When Foxy Lady and I imagined life if she passed away, I wanted to be able to raise Lil’ Fox (at the time Mini Fox hadn’t arrived yet) without the expectation that I would find someone to try to fill in that motherly role, both in terms of child-rearing and income. Financially, that meant that I needed to be prepared to become a single income family.

So for me, I “needed” more life insurance for Foxy Lady than she needed for me just because of how we would move on in the event the other one passed away. But that balanced out because at the time I was making more with my job than she was with hers. My higher income meant I needed less insurance for her, but my desire not to remarry meant I needed more—so that balanced out. Her lower income meant she needed more insurance for me, but her desire to find another spouse over time meant she needed less—again balancing out. Really, really morbid, and I think this is why conversations about life insurance are so hard. Seriously, who wants to think about these things? But if you want to be responsible to those you might leave behind, you have to.

So there you have it, part 1. Tomorrow I’ll post part 2 on how we decided which kind of policy to get and how much. See you then.

Are you gambling or investing?

September 17, 2015September 16, 2015 Stocky Leave a comment

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

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

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

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

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

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

Recreational investing

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

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

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

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

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

International Perspective—Venezuela

September 14, 2015September 14, 2015 Stocky Leave a comment

Alberto and Stocky got our MBAs together from the University of Chicago in the 2000s. He was one of the smartest classmates I knew and went to McKinsey after business school, then to private equity, and now to a big data start-up. Plus, his Facebook picture is of him and Milton Friedman, so you know he takes his economics seriously. Alberto grew up in Venezuela and is going to help us with a second installment of International Perspective, by telling us how investing works in Venezuela.

Stocky: Thank you so much for taking the time to educate our readers on how investing works in Venezuela.

Alberto: I’m happy to. After reading this, they might come to appreciate how not-screwed-up things are in their own country.

Stocky: Wow. That’s a certainly enticing. So how do Venezuelans approach investing.

Alberto: Sadly, the biggest goal for most people is to get their money out of Venezuela and into the United States. Once their money is in the US, then they can invest it in bonds, real estate, etc.

Stocky: Wait. What? That doesn’t make sense. Why would they do that?

Alberto: The Venezuelan economy is so screwed up (thanks to decades of socialist economic policies, which were then turbo-charged by Hugo Chavez and his cronies in the last 16 years). There really aren’t capital markets to speak of, so you can’t invest in stocks. Also inflation is about 200% (the government claims 60% but no way it’s that low, even though they stopped publishing any sort of figure on the subject several months ago). Although you can get maybe 15% interest in a savings account (which seems really high at first), you’re losing a ton of money due to inflation. So people want to get out of Venezuelan bolivars and into US dollars.

Stocky: Man. That’s pretty different from maximizing your 401k or investing in index mutual funds, like we do in the US. So how do people go about moving their money to the US.

Alberto: First, Miami is the destination for maybe 90% of all the money leaving Venezuela. It’s good because it’s geographically close, it has a very strong Latin American community, and there are a lot of ex-patriots from Venezuela.

Stocky: Isn’t that where Tony Montana from Scarface lived?

Alberto: Yeah, but he was Cuban, not Venezuelan. Since Venezuelan law doesn’t allow people to take their money out of the country, it leads to a black market. So your average Venezuelan with money will send bolivars to a “money exchanger” who will take that, convert it into US dollars, and then deposit that money into a US bank like Chase or Citi or any other bank like that. It’s all done at the black market exchange rate which is about 700 bolivars to the dollar; although the “official” exchange rate according to the government is 6 bolivars to the dollar.

Stocky: That sounds pretty “cloak and dagger”. Is that safe? I could imagine crazy stories of people getting ripped off with stuff like that.

Alberto: Yeah, sometimes people get ripped off, but these black market transactions have become so common that pretty much everyone knows someone who does this. Maybe it’s your uncle or your dad’s best friend or someone like that who will handle things for you. That’s pretty common.

When you start working with someone, you start small. Maybe $500 worth, or something like that. After you see if they are honest, then you can give them more and more money. Through it all, people just want to get as much money out of the country as possible because the economy is in freefall. So I suppose they’re willing to take on a fair amount of risk. If you tried to move your money and lost it that sucks, but if you keep it in Venezuela you’re pretty much guaranteed that you’ll lose it to hyperinflation.

Stocky: Ouch. Once people get their money to the US, how do they invest it?

Alberto: Mostly it’s either in CDs or bonds, or those who can afford it will buy American real estate.

Stocky: I spend a lot of time talking about asset allocation and how people should invest in stocks and not too much in bonds. It sounds like these people aren’t listening to my advice. Who would do such a thing?

Alberto: Surprisingly, www.thestockyfox.com is not the #1 website in Venezuela, at least not yet. I think there are a couple reasons behind that. First, remember that the goal is getting the money out of a country with hyperinflation. If people can make 2-3% with scant inflation by moving their money to the US, that’s a nice win for them.

Second, most Venezuelans, even most upper-middle class ones, are not that financially literate. Learning the intricacies of investing, asset allocation, the differences between stocks and bonds, etc., just aren’t that high of priorities. So once people get their money to Miami, they just choose a pretty simple investment which is a savings account or bond.

Stocky: After the money is in Miami and invested how do people get it back to Venezuela. After all, isn’t the whole point of investing so you can take money today, let it grow over time, and then spend it on your needs tomorrow?

Alberto: That’s an interesting point. I don’t think most people are giving much thought to bring the money back home. People are waiting to see what’s going to happen to the country. Politically, and therefore economically, Venezuela has been a crazy roller coaster. When Chavez took control in 1999 he implemented a ton of social reforms that turned the economy on its head. When oil prices were high, we could afford to do that, but now that oil prices have come way down, things are pretty bad.

Because of all of that, I think people are just waiting to see what happens to the country. If there is a miracle turnaround like what happened in Colombia or better yet Chile, then people will see a future in Venezuela and bring their money back to spend. However, I’m not optimistic, and if things continue to stay bad, I think people with the means will look to leave the country and join their money in the US.

Stocky: That’s just crazy. What do people do who can’t move their money abroad?

Alberto: It’s really, really sad. If people can’t move their money out of the country, you end up with some really bizarre economic activities. Some people will invest in things like appliances. Literally, it’s not uncommon to buy something like a washing machine with the intent to sell in. Let’s say you buy one for 20,000 bolivars, use it for a couple years, and then because of inflation you can sell it for 50,000. You made money plus you got the use of the appliance for a while. Had you just kept that money in cash, you’d end up with much less. There are active secondary markets for appliances, cars are a big one, really anything that you can buy that is durable.

Stocky: Are you serious? We had a mailbag question from Ally about investing in consumer electronics, and the idea just seemed so crazy to me.

Alberto: You’re right, it is crazy, but that’s the reality in a country where the economy is just strangled by inflation. Consider yourself lucky that you’re from a country where you’re pretty confident that your dollar will buy something very close to a dollar’s worth of stuff next year.

Stocky: You’re painting a pretty grim picture of Venezuela. What do you think the future holds for your home country?

Alberto: It pains me to say that I’m just not confident. Maybe you could have a massive turnaround like what happened to Chile in the 1970s of even Col0mbia in the 2000s, but I think the socialist government is so entrenched, and the magnitude of the brain drain has been too large for things are going to get better any time soon.

You’ll continue to have money flow out of the country as fast as it can go, but even more troubling is that you’ll have the most talented people leave. Back at school there were probably a dozen of us Venezuelans who were getting our MBAs from one of the best schools in the world. None of us went back home because there just aren’t any opportunities. But for Venezuela to succeed it needs people like us to go drive change. It’s a catch-22: change won’t happen without smart and capable leaders, but the country is so screwed up that all those people leave. It’s not a good situation.

Stocky: On that happy note, I want to thank you for sharing how things work in Venezuela with us.

Alberto: Thank you. Venezuela had a lot going for it when I was a child, but unfortunately, the government has thrown a lot of that away, and mortgaged the country in the process. I hope that things do get better, I truly do.

For all my international readers, I plan on doing more of these types of posts that tell us how investing works in different parts of the world. If you would be interested in sharing how it is done in your country, please contact me and we can set something up.

Location, location, location

September 10, 2015September 9, 2015 Stocky 1 Comment

We have made the move from Los Angeles to Greensboro, North Carolina. Obviously that’s a huge change. LA is one of the Top 10 cities in the world in terms of cultural relevance; Greensboro is the 3^rd largest city in the 9^th largest state in the country.

LA is an amazing place to live. Probably the best thing about it (and other super-cool cities) is that everything’s there and it’s all super-high quality. World-class culture: amazing museums, galleries, music venues, restaurants, etc. World-class natural beauty: the ocean and mountains are right there, and the weather is probably the best in the world. World-class sports: the Lakers, Dodgers, Clippers, Kings, Galaxy, Ducks, Angels, USC, UCLA, the Olympics. World-class industry: obviously entertainment, but also financial services, aerospace, transportation.

Across the board, LA has the best of everything. But we know nothing is free in this world, and that certainly applies here. Along with everything I mentioned, LA has among the highest costs of living in the country, especially when it comes to housing. When Foxy Lady and I were thinking about moving, the stratospheric cost of housing definitely played a major part in the calculation.

How much does living in a super-cool city really cost?

In LA we lived in a nice house, but by no means anything off the charts. For an upper middle-class family of four, it was probably a pretty average house: 4 bedrooms, 4 bathrooms, 2900 square feet. But because it was in LA it was really expensive—$1.5 million. That seems crazy, but that’s just the way the real estate market is in LA. Similarly sized houses that weren’t as nice would go for maybe $1.2 million and the ones that were really nice on the inside could go for well over $2 million. It’s like an alternative world out there.

You can compare that to a place like Greensboro. A similar house in a nice neighborhood would probably run you about $400k. That’s a huge difference!!! Over $1.1 million!!!

Now we have something to work with. We know there are huge benefits to living in LA (all the things I mentioned above, plus many more) but we know that comes at a cost (the difference in home prices). If we took that $1.1 million and invested it in the stock market (assume a historic 6% return), that difference comes to about $66,000 per year, which breaks down to about $5500 per month or $1300 per week. That is how much “extra” we were paying to live in LA versus a place like Greensboro.

Is it worth it?

$1300 per week is a lot of money. But just because something is expensive doesn’t mean it’s not worth it. Living in LA is awesome. There’s no question about it. But is it that awesome? When Foxy Lady and I looked at it with the “$1300 per week” premium, it just wasn’t awesome enough.

Raising two little cubs dictates how you spend your time, and we found that while there were amazing opportunities all around us to enjoy things only available in places like LA, we weren’t taking advantage of them. We never went to the super-cool music venues like the Greek Theater or the clubs on Hollywood Boulevard, because . . . well, because we had two little ones. We never went to see the Lakers or Dodgers or Kings because tickets were expensive and getting down there was a hassle. Rather we went to see the local college team play for a couple bucks. A couple times we went to a 4-star restaurant and it was amazing, but mostly we would go to local places that were kid friendly because . . . well, because we had two little guys (McDonald’s playland is pretty popular in our house).

But it’s not like we were hermits. We did stuff and had a lot of fun. We’d go to the local park pretty much every day to play on the swings and slide. We’d enjoy the kid-oriented events at the local library. We did a lot of playdates with friends who had kids of a similar age. We’d go to the beach or go hiking along the nearby trails. We’d go to Universal Studios which was only a couple miles away every once in a while.

On Sunday evenings, after the cubs were asleep in their beds and Foxy Lady and I had a couple peaceful moments to reflect on the weekend, we’d ask ourselves if we got our $1300 worth of LA living that week. The vast majority of the time the answer was “no”. We were living in one of the most amazing cities in the world, and we weren’t taking advantage of it. At this stage of our lives (two little kids) and our personal tastes which tend to be on the pedestrian side, we were perfectly happy living simpler lives.

Once we came to that conclusion, the decision became pretty easy. We could move to a lower-cost area and pocket that $1300 each week. When we did get a hankering for the highlife we could take a vacation to LA (or New York or Boston or Miami or San Francisco or London or Paris or Tokyo); that trip might cost a few thousand dollars but we’d still be well ahead of the game.

So for us it wasn’t worth it to pay the “super-cool city premium”. But for many it is. We had neighbors whose families lived in LA so leaving wasn’t really an option. I totally get it. We had other neighbors who worked in the entertainment industry plus they would go out to banging clubs a few nights a week, so they were really getting the most out of LA. And for them, staying in LA and paying the premium totally makes sense.

Now we’re in Greensboro and I must confess that I really like it. It’s a nice slice of small-town America, but not too small. We have a symphony, an opera, a minor-league baseball team, a children’s museum, a science center, college basketball, and a lot more. But let’s be honest; undeniably, all those would compare unfavorably to their counterpart in LA, and that’s a bummer. However, when you add in that $1300 per week that we’re saving, at least for us that tips the scales.

Personal finance is definitely about investing in stocks and bonds, 401k and IRA accounts, and all that. But a big part is managing your expenses. Some people look at that as budgeting your money and buying one less Starbucks per week or something like that, and there is definitely a place for that. However, we found that probably the biggest impact on our spending is choosing where to live. Places like LA, New York, Boston, Seattle, Chicago, Miami, and Dallas are amazing cities which offer its residents incredible amenities. But, if you’re anything like us, you need to ask yourself how often you will take advantage of them? If the answer is “often” then living in those Alpha cities probably makes sense. For us, the answer wasn’t often enough, so we “downgraded” our city and will pocket the difference.

How about you? What are the amenities in your city that you like the most?

The tail of Squirt

September 7, 2015September 3, 2015 Stocky 4 Comments

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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).

225857_10151108883163075_1506766908_n — Not one to be left out, Squirt enjoys (actually she totally hates) dressing up in her Halloween costume

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).

Pete and Squirt — Mini Fox contemplating Squirt’s tail . . . tasty

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.

Post surgery — It was a pretty major deal, a 12-inch incision on her back and then another 8-inch one on her leg that you can’t see. Foxy Lady started calling her “Frankensquirty”

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.

562498_10150730868448075_1892737353_n — Squirt sneaks in a wet kiss on an unsuspecting Lil’ Fox a couple years ago

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.

541597_10152687655998075_4334182763279206511_n — Lil’ Fox taking a nap, deciding a dog is more comfortable than a pillow

Inflation killers—Store brand products

September 3, 2015September 3, 2015 Stocky 3 Comments

When I was a little kid, I remember hanging out with my older cousins. Who knows why, but for some reason one of them mentioned the word “generic”. I didn’t know what that meant so my cousin explained: “You know how on the bottom shelf of the grocery store they sell rice in a bag that just says ‘rice’? That’s ‘generic’. If you’re too poor to buy Uncle Ben’s, that’s what you buy—generic.”

Okay so maybe we weren’t the most politically correct family, but in the early 1980s, that’s what people thought of when they thought about generic products. There wasn’t a fancy term like “store brand” to even try to dress it up.

Growing up, I don’t remember a single time that we bought a generic product. It was always Crest and Gillette and Minute Maid. As a kid I would have been ashamed if we used generic stuff, and horrified if one of my friends from school ever found out. That would be playground suicide.

My, oh, my, how times have changed. Today, store brands have become a legitimate alternative to brand-name products. Even a self-respecting third-grader can hold their head high using Kirkland toothpaste or Kroger green beans. I can hear you saying, “that’s nice and all, but what does that have to do with personal finance?”

The ascendance of store brands has been a huge boon to price conscious consumers. On average they cost about 25% less than brand name. And here’s a dirty little secret that isn’t so secret—a lot of store brands are made by the brand name manufacturers. So for example (and I may get the brand wrong, but you’ll get my point) CVS batteries may very well be made in the same factory that churns our Duracell batteries. The difference is if the label says CVS they cost a lot less.

Other stores have taken it to a new level where their store brand is perceived to be better than the brand name. Trader Joes is a grocery store in which nearly all their products are “Trader Joe” brand, and that chain has a fiercely loyal following. Similarly, Costco sells Kirkland brand, and I can tell you that I trust that more than almost any brand name. The fact that those products tend to cost a lot less is icing on the cake.

Financial impact

So now let’s bring this full circle. When thinking about your finances, you know that inflation is really important. A 1% change in inflation has huge consequences over the course of a few decades; even 0.1% changes in inflation are noticeable.

Now let’s play that ace in the hole we have called store brands. The math is a little rough, but let’s say that using store brands which cost about 25% less is the equivalent of reducing inflation by 0.5% over the next 50 years. The impact is enormous.

Imagine a 22 year old today who invests steadily until she’s 60 and ends up with $1 million. If you assume 3% inflation, that $1 million when she’s 60 is the equivalent of $325,000 today. That’s a lot of money but inflation certainly took a big bite out of it. On the other hand, if you did the little store brand trick and assumed that that could take you to the equivalent of 2.5% inflation, then that $1 million when she’s 60 would be equivalent to $390,000. That’s still a pretty big impact, but using store brands could equate to something like $65,000 in today’s dollars or $180,000 when you retire. And I would bet I’m underestimating this.

What’s the point?

The point of all of this is two-fold. First, there is a lot of money to be saved by going with store brands. The Fox family pretty much exclusively buys store brands when that option is available, and Kirkland brands has a special place in our hearts. But this really isn’t a blog on personal spending, so I’ll leave that there.

The second, and more important, point is that the evolution and popularity of store brands represent an amazing example of how our economy is giving people better and cheaper options. And “better and cheaper” means inflation isn’t as bad as you’d think.

Go back to the early 1980s, and imagine you’re reading The Stocky Fox. Sure I might be wearing a white suit with a pastel t-shirt, but just like now I’d be trying to give good advice on how to best manage your finances. We’d talk about inflation and how you need to plan on it eating away about 4-5% of your money each year.

No one was anticipating that retailers would figure out that they could sell the functionally equivalent product without the brand name for higher profits while passing on savings to the consumers. Yet that’s exactly what happened. Store brands by themselves have probably taken away about 0.5% from the inflation number.

Of course we’re in 2015 so my pastel t-shirts are all packed away, but I’m sure there will be another innovation just like store brands that will offer us better products at lower prices. This will again take a bite out of inflation, and make it turn out to be not as bad as we think it will be. And I’ll have another “inflation killer” to write about.

What a crazy week on Wall Street

August 31, 2015August 31, 2015 Stocky 5 Comments

“The more things change, the more they stay the same” –Jean-Baptiste Alphonse Karr

Stocks have taken a really wild ride lately. Starting last Thursday, they had a free fall down 10%, then they recovered about 6% of that. Things finally settled down on Friday when the market finished virtually unchanged.

There was actually a streak of 6 days where stocks moved at least 1%. Generally speaking a 1% move is pretty big (in this market it’s about 170 points on the Dow). To have that happen 6 days in a row seemed pretty extraordinary. More than the steep drops, I think it was the relentless “huge” moves everyday that particularly put my nerves on edge. I think I can better handle just a crazy day and then accept that it’s over. Kind of like an earthquake in Southern California; it’s violent and scary, but it just lasts a couple seconds, then it’s over and you know you need to start getting on the business of recovery.

So I wanted to ask two questions:

How often does the market move 1% for so many days in a row?

Before this streak of 6 days in a row, the next longest streak in 2015 was for 3 days. The longest streak in 2014 was 5 days, the longest streak in 2013 was only 3 days, and the longest streak in 2012 was 2 days. So that starts to tell me that a 6 day streak is not all that common.

In fact, you have to go back to 2009 and the aftermath of the Great Recession to have a streak of 6 days. However, that was the tip of the iceberg. During that time there was also a streak of 8 days, another of 7 days, and two separate streaks of 10 days in a row where the market moved at least 1%.

I think that puts what we just went through in perspective, both for the good and the bad. First, what we went through was a pretty big deal. Crazy weeks like that don’t really happen all that often, and you survived it so congratulate yourself.

That said, compared to the Great Recession, this was just a small blip. And that feels right. During the depths of the Great Recession, people were actively questioning the viability of capitalism and the stock market, and there was a real sense of capitulation. Those days have left deep scars for many, a lot of whom have sworn off stocks just because that was such a tough time for investors.

I never felt anything close to that during this roller coaster. When things were falling, sure it sucked, but I sensed that most people were looking at it as a blip that would prove a good buying opportunity (as turned out to be the case). Sure, it was frustrating when we finished one bad day and then follow that up with another bad day, but again it never seemed people were losing faith.

Put all that together, and I’ll call this a class 2 hurricane. It caused damage and but no lives were lost. We’ll forget this in a few months. That’s very different from a class 4 hurricane (Great Recession) or class 5 (Great Depression).

Has the market gotten more volatile in recent years?

The other thing that occurred to me was is all this market volatility increasing. You hear people talking all the time about how the market is changing, typically for the worse. I don’t buy a lot of those arguments, but I do believe that the market is changing in undeniable ways—computers are driving more trades, investing is becoming an international game, investors are getting savvier, information travels much more quickly, and you could go on and on.

I pulled data on the S&P 500 going back to 1950 when the index began. I counted the number of days where the market moved at least 1%, and I was fairly surprised by the results:

	Up 1%	Down 1%
2010s*	12%	11%
2000s	16%	17%
1990s	11%	9%
1980s	13%	11%
1970s	10%	10%
1960s	4%	5%
1950s	7%	6%

Looking at the data a few things stand out. First, there seemed to be a big change around 1970. Before that about 10-13% of the trading days had big moves. But since the 1970s, those days jumped up drastically to at least 20%. I tried to think what would have caused this stark change and I couldn’t come up with anything. Sure, the world has changed drastically since the 1950s, but was the change from the 1960s to the 1970s any greater than, let’s say, the 1990s to the 2000s? I don’t think so, but something happened. The data’s definitely there.

Second, the 2000s were the most volatile decade in this data set. If you look back then, that makes sense. The decade was bookended by two disastrous periods for investors—the tech bubble popping in 2000 and the Great Recession in 2008. Both periods put stocks in an absolute frenzy, diving one day then freighting a recovery the next. I’m not old enough to have lived through the Great Depression or the lost decade of the 1970s, but I did feel I cut my teeth in the 2000s. I suppose in a perverse way, it’s comforting to know how crazy of a time that decade proved to be.

Finally, and most topical, is that the 2010s, so far are a pretty average decade as far as volatility goes. Sure you had the past week and a half which was a whirlwind, but as we saw at the top of this post, the previous years were pretty calm. This decade compares pretty favorably to the 1990s, 1980s, and 1970s.

I think it’s important to put this in perspective and somewhat debunk all the doomsdayers who tell us that things are so different. The opening quote, “the more things change, the more they stay the same,” which to further prove it’s point was first coined in the early 1800s, seems to prove its wisdom. Sure we can get caught up in all the craziness of the past few days, and that’s okay. But let’s not lose sight of the fact that this is just the way the stock market is and has been for a very long time.

* 2010s are through 28-Aug-2015.