Friday, February 24, 2017
Recently, I was driving along a dark country road on my way to the back gate at Furman University. As I approached a bend in the road I thought, “What if there is a car coming toward me?” I moved over closer to the edge of the road. A few seconds later I discovered that I had made the right move. I didn’t see that oncoming car or even its headlights, but I heard that little voice in the back of my head. Back in December, I decided that I really needed to add some upper body exercises and stretching to my morning walks. In January I consulted with a Furman Health Science professor who recommended swimming and weight machines. Since I ruled out Yoga, he suggested the therapy tank for my lower back and leg problems. Then one morning in early February, I started my walk confidently expecting to set a new five day record. However after 1.5 miles, just happily walking along the trail, minding my own business, I felt a sharp pain in my lower back, an infrequent reminder of an injury I suffered while working on a car about 29 years ago. Occasionally stopping to stretch the affected muscles, I was able to limp the ½ mile back to my car. I should have accepted the offer of a fellow walker to drive me back to the Sustainability Center parking lot. His car was parked nearby. Life is like that. Often, that little voice lets us know when we are on a collision course with the universe. When that little voice conflicts with our desires, we tend to ignore it or come up with some kind of explanation excusing what we know is a bad decision. Sometimes, we just say, “Screw it!” and do what we damn well please. Then the day comes when we can’t make the minimum payment on all our credit card bills, the repo-man comes in the middle of the night to haul away that new pickup truck, or we realize that paying off those student loans might require a diet of Ramen Noodles and tuna fish for the next thirty years. Now what? First, extend a little compassion and bit of loving kindness to yourself. After throwing my back out, yelling at myself wasn’t going to help anything. Loving kindness included ice packs, heating pads, and two days spent primarily on the sofa and in the bed. On the third day, I was able to hobble around the Furman Lake one time, less than one fourth of my normal distance. Over those two days of forced inactivity, I decided to listen to that little voice and pull the trigger on a more balanced exercise program. If your finances have crashed and burned, whether it was your fault or the result of powers beyond your control, take a deep breath. Accept the reality of your situation. Stop pretending debt or a lack of money is not a problem. At the same time, avoid the temptation to engage in dramatic outbursts that aren’t going to make you a better person or the world a better place. As the football players say, “It is what it is.” I signed up as an alumni member at the Furman Fitness Center. I am swimming one day a week. I hope to increase that to two days a week, but not yet. One of the attendants taught me how to correctly use the eight weight machines that are currently a part of my every other day circuit. And yes, I am attending an easy Yoga class designed for pitiful old folks, like me. I am not at all sure about this. I have a bad history with exercise, because exercise isn’t fun. Walking is fun, so it is not exercise. As for walking, I am still out there on the trail. I am not back to 30 or more miles a week, but with a little luck, I might hit 28 miles this week. How fast? Don’t ask. If it is moving slower than me, it is a rock. Don’t turn down help when you need it. Not accepting that ride was just a pointless display of machismo when a bit of humility would have better served my cause. Be willing to learn. The Chinese say, “When the student is ready, the teacher will appear.” There is somebody out there who can help guide you, if you are willing to stop making demands of the universe and start listening to that little voice. Maybe a really physically fit Health Science professor who has spent his entire adult life studying exercise physiology might know a bit more about the subject than this retired engineer. I have found if you treat an expert with respect, he will usually be willing to give you the advice you need—for free. The question now becomes, “What price are you willing to pay?” to achieve financial freedom, whatever that might mean to you. To get something, you always have to give up something. If I want to continue to lose weight, increasing the probability that my heart will return to a normal sinus rhythm, I will need to eat less or exercise more. It looks like, at least for the moment, I have maxed out on exercise. What is the logical next step for you? Food (Calories In) = Fat Stored + Exercise (Calories Out) Money In = Money Stored + Money Spent
Sunday, February 12, 2017
A Charitable Donor Advised Fund is a simple vehicle that allows the investor an opportunity to receive a larger charitable deduction for the same gift while creating an opportunity to actually give more money to a charity than was placed in the fund. Many charities have no mechanism for receiving appreciated shares of stock or mutual funds, but any charity can deal with cash contributions issued by a Charitable Donor Advised Fund. Here is how it works. Normally a donor would sell shares of stock, pay capital gains taxes on the increase, and give the balance to charity. In an example presented in OnInvesting, $100,000 in stock less $14,250 in capital gains tax would leave $85,750 for charity and $24,010 in personal income tax savings for the donor. If the giver had a Charitable Donor Advised Fund with his broker, he could transfer $100,000 in appreciated shares directly to his account without paying any taxes. This would save him $28,000 in personal income taxes and leave the entire $100,000 for charity. But wait! It gets better. As trustee of the account, the donor can invest the $100,000 allowing him to give much more than $100,000 to designated charities over the course of time. Once you transfer your money to the Charitable Donor Advised Fund, it is just as gone from your pocket as if you put the money in the plate on Sunday morning. You get the tax deduction. You still control it, but it can only be used for charitable purposes. The money growing in your charitable account grows tax free, just like the money in your 401(k). However unlike your 401(k), when the money is sent to a charity, it isn’t taxed. Like the Charitable Remainder Unitrust, I have written about in a previous blog article,
Friday, February 10, 2017
Friday, January 13, 2017
Thursday, January 12, 2017
An article entitled “What is Your Biggest Investing Challenge?” appeared in a recent issue of Charles Schwab OnInvesting. I would like to comment and expand on some of the author’s worthwhile observations. Knowing yourself, your limitations, your weaknesses, your biases, is an essential component to self mastery as well as finding the road to financial freedom. Not playing the game is the most frequent and the most serious mistake made by most Americans. There are really only two ways to build up significant net worth. The oldest is real estate. Unfortunately, playing that game requires a lot of money. For most of us that means borrowed money. As 2006 demonstrated nothing, including real estate, goes up forever. Leverage is a dangerous friend. When the market goes south it is pretty easy to lose more than your total investment. Losing 100% of all your money is bad. Losing more than 100% is totally unacceptable. When you are far enough along to pay cash for income generating rental properties, you probably don’t need to invest in real estate except for the purpose of diversification. That means the stock market for all but a few who really understand real estate and have the resources to play in that arena. The best place to start is your 401(k), 403(b), traditional or Roth IRA depending on your particular situation. Small automatic deposits taken directly from your pretax income won’t be missed, but when these funds are stashed away in a tax sheltered vehicle over the course of a working lifetime, the results can be astonishing. This kind of investing doesn’t even require more than the initial decision to start the journey. Life cycle funds sometimes called target date funds will maintain an age appropriate balance of foreign and domestic holdings in both stocks and bonds at a very low cost. The flip side to staying out of the game due to under confidence is overconfidence. This investment sin can take many forms. The most obvious is gambling too much money in a single high risk/high reward investment—such as lottery tickets. Just joking, but I think you get the idea. Perhaps the most frequent manifestation of this mistake is holding more than 10% of your liquid net worth in shares of your company, the one who gives you a regular paycheck. Many employees have nearly all their holdings in shares of their company. If that stock tanks, not only will you lose a substantial portion of your nest egg, but you might even lose your job at the same time. However, overconfidence is something that can affect anyone, such as me, who has enjoyed some success in the market. It is easy for me to think, “I know what I am doing,” when I am riding a bull market or maybe just got a little lucky on a couple of investments. I have to remind myself from time to time that I will never outgrow the need for wise counsel and research even when investing in the most conservative funds. If I don’t remind myself, believe me, at some point the market will remind me of my limitations. The article calls out “Status Quo” as a common investment mistake. Sometimes doing nothing is the best investment decision. Sometimes it isn’t. I am a buy and hold kind of guy. This is a very good strategy for most investors. When combined with DRIP (Dividend Reinvestment Plan) that plows dividends back into new shares of stock, doing nothing can put the power of compound interest to work in some remarkable ways. A stock that pays a good dividend, like AT&T can double its value in less than ten years even if the price per share doesn’t move very much. However, sometimes things change. The recent increase in the Fed rates caused a quick drop in the bond market. A complete reliance of bond funds would have hurt a portfolio that was out of balance. I should have been warned when I heard the words, “ability to borrow money at lower rates,” but Kinder Morgan Partners had been a star in my crown for quite a long time. When the parent corporation bought out the limited partnership, I let 90% of my position in the partnership roll into Kinder Morgan. Shortly after this decision, the news came out that Kinder Morgan was carrying too much debt. I lost half my money in a very short time. I comfort myself that I lost “the house’s money” rather than any of my initial investment, but that is just my feeble attempt at dealing with cognitive dissonance. Regret aversion is the next mistake mentioned in the article. Simply put, “The burned child fears the fire.” Don’t worry. If you invest in the market you will lose money—some of the time—in something. However, Siegel’s constant tells us that over the last two hundred years, American equities have delivered a remarkably steady 7% return over any reasonably long period of time. Just hang on and scream. If you maintain that well diversified, age appropriate balance through good times and bad, you will be buying stocks when they are cheap and selling them when they grow expensive, unlike most of your neighbors who will be selling when the market tanks and chasing stars when they are at their most over valued. By the way, chasing hot returns is the last investment mistake mentioned in the article. Now take a good look at the person in the mirror. What are you doing with your money? Do you have a plan? Are you following your plan or changing it on a daily basis? Do you know your own comfort level? I have tried “trading” using technical analysis on two occasions, one was pretty successful, but I realized I am simply not wired to be a trader. I have also discovered I should stay away from individual tech stocks. As an engineer, I tend to fall in love with technology rather than with the business underlying the technology. This is a big mistake. I limit my technology holdings to mutual funds or a managed account. Finally, I love fossil fuels. Chevron has been a consistent money machine since the beginning but I can talk myself in carrying too much in energy shares. I have been bitten a couple of times by this predilection, but I hope I am growing wiser in old age. Now! For Heaven’s Sake! Let’s be careful out there!
Wednesday, January 4, 2017
The question comes up again and again, starting when we first ask a child, “What do you want to be when you grow up?” Now, I find, as I am closing in on 66 and Social Security, I am still asking myself the same question. I think that can be healthy as long as I remember it is unlikely that God or the universe is going to give me the answer. I hope that my Calvinist brethren extend me some grace on this subject, but I come down pretty hard on the free will side of that dichotomy. While I am open to the possibility of miracles, I don’t believe that God is generally in the business of telling people where to attend school, what major to choose, who to marry, where to find employment, or the best investments for retirement. Answering those questions? That is our job. Unfortunately, we all want the “right” answer to those important questions because we know that we are not omniscient, either about the present or the future. The world is a fabulously complex interconnected system. In the present moment, we are an amalgam of everything in our past, our parents, our environment, our experiences, and our beliefs about the nature of the universe and our place in it. Given all those prejudices and short-comings that make me who I am, I have to make decisions to move forward in my life in a universe that I can not possibly understand. Even if I had a perfect understanding of the present and natural law, I still have no guarantee of finding the “right” answer. Edward Lorenz coined the term, butterfly effect, in his study of chaos theory to describe how a minute change in initial conditions can produce an enormously nonlinear output in complex systems. As the poet says, the best laid plans of mice and men often go astray. Most outcomes in scientific as well as sociological experiments are not either/or, but probabilistic in nature requiring the use of statistical analysis to describe and understand the answer. We make decisions based on our understanding, our metanarrative, the stories we tell ourselves. Then we take action based on those beliefs. Then we get results. Did I get the results I desired, the results I expected? Were my actions wise actions, unwise actions, or sin? I don’t always have enough information to answer those questions. A wise decision can produce undesirable results. Even if the answer is no answer, there is hope. We can learn from our own experience and the experience of others. We can discern what kinds of actions are likely to produce what kind of results. We can seek out counsel from those who are more experienced, knowledgeable, and successful in some particular area of interest. We can plant and nourish a network of trustworthy friends and family members who will help us in time of need. Then after “talking through” all of the possible options from beginning to the desired outcome, I have to make a decision. Relax. Don’t be so hard on yourself. Be courageous. If you couldn’t possibly know enough to make to make these kinds of life decisions, there wouldn’t be 7 billion of us humans running around on God’s green earth. I also believe in a God who is there, who wants to bless me and be a part of my life, who will run toward me with open arms if I choose to move even a step in his direction. If this wasn’t so, why would my Savior freely choose to suffer death on a cross for my benefit?