Saturday, March 18, 2017

How About That Person in the Mirror?

Lately, it seems the air is filled with self righteous finger pointing. It seems that all these attacks, if successful, would benefit the finger pointer and his followers at the expense of someone else. I am tired. How about we try something different? Let’s look at that person in the mirror and ask ourselves, “What can I do today to make myself a better person and the world a better place?” It doesn’t have to be all that much, but do something. Make a start.

How about my body? If I think the cost of medical care is excessive, what can I do to lower the burden on our health care system? Can I find a way to eat a healthier diet? Can I undertake and exercise program? Maybe I could drink one less beer this evening?

How about my heart? Looking deeply and honestly into my motivations can be less than pretty. How much gratitude is down in there? How about forgiveness? Can I find a way to make an enemy my friend? Are my goals in line with my understanding of God and my faith? Do I have a generous heart? It doesn’t have to be all that much; you could leave a 20% tip for that waitress schlepping your food on what is obviously a bad hair day.

Do you need to improve your finances? I had to ask that one. After all, this is a personal finance blog. I would also add that improving your relationship with money can put you in a position to do more good in this material world. Maybe you could find a way to work a little harder, a little longer, or a little smarter. All of these options are likely to put a little more money in your pocket. Can you find a way to spend a little less on things that cost you money, like cable TV and a little more on things that pay you money, like stock in a cable TV company?

If we could all spend a little more time finding ways to produce a better crop in our own garden and a little less time chest thumping and trumpeting our moral and intellectual superiority this world might be a happier place.

I don’t know about you, but I still have some work to do with that guy in the mirror.

Matthew 7: 1-5

“Do not judge, or you too will be judged. For in the same way you judge others, you will be judged, and with the measure you use, it will be measured to you.
“Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye? You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye.

Sunday, March 12, 2017

If Your Mind Is Empty

“If your mind is empty, it is always ready for anything, it is open to everything. In the beginner's mind there are many possibilities, but in the expert's mind there are few. ” Shunryu Suzuki

Beginner's Mind refers to having an attitude of openness, eagerness, and lack of preconceptions when studying a subject, even when studying at an advanced level, just as a beginner in that subject would. (Wikipedia) It is an openness to learning new things.

Over the last fifteen years, since I made the decision to learn something about the art of investing, I have developed my personal investment paradigm, a mixture of Modern Portfolio Theory, Value Investing with a tip of the hat to the criticisms of Taleb and Mandelbrot. For new readers, Modern Portfolio Theory recommends owning the entire world market through the purchase of low cost index funds, since it is very unlikely that you or anyone else is likely to beat the market over the long haul. Value Investing suggests that the investor buy underpriced bargains, particularly if the pay a healthy sustainable dividend and then hold onto those stocks—FOREVER. Taleb and Mandelbrot have proven conclusively that the world is a much more dangerous place than is described in Modern Portfolio Theory. However, neither of those authors has suggested a useful alternative method for the average investor. Taleb was a highly successful options trader. Unfortunately, that game is a little too rich for my blood.

P.S. Don’t forget about that “age appropriate” mix of bonds, CDs, cash, equities, precious metal, and real estate that is part of your investment contract with yourself.

While I am not flying around the world in a private jet, my personal investment paradigm has helped me achieve one of my goals, a comfortable early retirement. Now, I have discovered that as I have gained a certain measure of expertise, I have lost an equal amount of Beginner’s Mind. Even though I am constantly reading different books on personal finance and investment strategies, I feel as though I have actually read the same book one hundred times or I find when I am reading a book, I am judging it on the basis of my established prejudices.

This is important because my paradigm does not have a clue about what to do in the current environment beyond maintaining my contract with myself concerning the contents of my “age appropriate” diversified portfolio. Bonds and CDs don’t pay spit and stocks are overpriced due to the actions of the World’s central banks. A whole lot of money has been created out of thin air. The entire developed world is carrying a dangerously large debt burden. Interest rates have been held artificially low to stave off deflation. After collapsing in the 2006-2008 slow motion train wreck, real estate has recovered to the point that it no longer constitutes an option for the cautious, uninformed investor, like me.

It is time for me to take a deep breath, open my mind, and consider the possibility of learning a new art. This will involve trusting in the old Chinese adage that when the student is ready, the master will appear, as well as more work than I might find desirable in a comfortable retirement.

As I learn, if I learn, I will share what I have learned with you, my readers.

Friday, February 24, 2017

Financial Compassion

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 Smarter Way to Give

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,

Finishing Our Last Will and Testament

A Charitable Donor Advised Fund is another tool offered by our wretchedly complex tax code that allows even middle class folks the opportunity to utilize the same means routinely used by the rich to avoid taxes, increase their effective rate of giving in this life, and even leave a charitable legacy once they pass from this world into eternity.

Friday, February 10, 2017

This Old Car

Yesterday I needed to make one of those financial decisions that could be right or could be wrong. Only time will tell. We have two cars that have only required minor routine maintenance for about five years. Well, some noises started coming out from under the front end of our 2000 Altima that had to be investigated. The verdict was a few dollars shy of the $750 mark.

Now what? In retirement, we simply do not need a second car. However, my wife is not ready to accept that idea even though she now has a personal chauffeur on call 24/7. The Altima is 17 years old! But it only has 125,000 on the odometer. Since 1988, I buy new and then keep the car for twelve years or 180,000 miles—or more. The car is worth around $1,500 in a private sale. Obviously, putting more into a car than the car would be worth after it is repaired isn’t going to happen, but where to draw the line? I was expecting somewhere in the $400 to $500 range, but in my mind, I drew the line at $1,000.

My logic? If I don’t repair this car, my wife will want to purchase a second car. This will cost $20,000 or more to buy something that I don’t believe that we need. It will also reduce the available funds to purchase the planned “car of a lifetime” that I hope will replace our 2010 Acura at some time in the distant future. My wife, who happened to pick up on the other phone when I received the bad news, expressed her concerns in a manner that reflected her sentimental attachment to this particular automobile. My hope is that the repairs to the Altima will keep it on the road for at least another two or three years. Given how little we drive our cars in retirement, this is not an unreasonable expectation, but with a 17 year old car, I really can’t complain if this conclusion doesn’t pan out. Hopefully in that time, I will be able to convince my wife that we can get by with one car.

And then what? Since I was in junior high school, I have loved cars, expensive cars, fast cars, beautifully engineered cars. Like most people, I never had enough discretionary money to purchase one of these cars of my dreams. Now I am in a different chapter of my life, one where I have the free time, money, and health to indulge myself a bit. There is no guarantee that this will be true tomorrow. The car that replaces the Acura might well be the last car I ever buy. I want one that has a C or an E, or a 5 or a 6, or 400 on the back side of the trunk lid. If you know cars, you know what I am talking about.

Don’t worry. After a lifetime of pinching pennies and squeezing nickels, I don’t plan on doing anything silly. I have never made a car payment. I paid $600 cash for my first car and I have paid cash for every car we have purchased during our 42 years of married life. Avoiding the car payment is one of the secrets to finding financial freedom.

Friday, January 13, 2017

Problems in Paradise

I left Maui on Monday October 16, 2006. It was easy for me to determine the date as we were scheduled to leave on Sunday, but the airport was shutdown by the 2006 earthquake that occurred under the ocean about 90 miles from our little rental house. We were fated not to return until December 5, 2016. Back then, I was entering the stretch drive to retirement. Most of our subsequent vacations were used to find a location that had a lower cost of living, less traffic, lower taxes, and better climate than suburban Washington D.C. Also, renting cabins in the mountains of North and South Carolina is a good bit cheaper than vacationing in paradise. This helps out during those stretch drives that seem to be necessary at various critical points in our financial lives.

We discovered that much had changed over the course of ten years. The big news during our recent visit was the end of the sugar industry in Hawaii. The pineapple business was dying as early as our first trip to the islands back in the late 90s. At the end of this season, the last sugar mill in the state will close. The Hawaiian economy is now a two legged stool. Large scale commercial agriculture is dead. Only tourism and the enormous military presence on Oahu will be left to provide employment for significant numbers of Hawaiians.

After the sugar cane harvest, random volunteer stalks of cane pop up in the empty fields. In the past this didn’t symbolize anything but the end of another growing season, but now these empty fields seem kind of disturbing as they indicate the end of an era. The county hopes that these lands will be divided up into small scale farms. Given the value of land on Maui, I find that this hope is unlikely to materialize, at least not for very long. I see more and more condo developments until a limit, probably water, becomes an issue.

Speaking of development, the last ten years have been good for that industry. It seems that there are significantly more buildings—everywhere. We stayed in Kihei, one of the fastest growing towns in the nation. When we last stayed there over twelve years ago it had the flavor of a family beach resort. Now it is more developed, more expensive, and a lot more crowded. Risking a car trip down the main drag is now something that requires a little thought and planning. It didn’t use to be that way.

Tourism seems to be bifurcating. There are a lot more upscale stores and restaurants that cater to the rich. Lahaina, the local tourist trap, once had a large variety of knick knack shops, stands, and kiosks selling a wide range of junk to middle class tourists as well as stores for the upper crust. Now about the only thing left along the waterfront are expensive restaurants, high end jewelry stores and art galleries. The demise of Hilo Hattie’s, the quintessential Hawaiian gift store for everyone, tells a sad story. They have gone into bankruptcy court twice. It doesn’t look like they are going to make it. The low end gift trade now belongs to the big name stores, like Walmart. The national chains are now just about everywhere and really there isn’t much difference between the Barnes and Noble located in Greenville, SC and its sister store near Lahaina. Wailea is a wealthy enclave just South of Hihei. Here you can buy a condo for a million dollars. Beach front houses seem to start somewhere above five million and go up and up and up. The local mall, The Shops at Wailea, charges $25 for parking! If you spend more than $25 in a single store, you get a voucher allowing you to park for free. Otherwise, be ready to fork over $25 for the privilege of visiting their mall. Obviously, they don’t want locals or people like me soiling their pavement with our presence.

Even though the traffic is much worse everywhere, there are still enclaves that are more or less as I remember. Up on the mountain, it is still peaceful, quiet, and cool. Makawao and Paia still have a counter culture, hippie, kind of flavor. Although, the aging hippies from the mainland had better have some limit left on their credit cards if they plan on spending much time in those gift shops or restaurants.

If you think a two week vacation in paradise is a financial stressor, imagine living on that island. Many residents of Maui County need two or more jobs to make ends meet. Good paying jobs for average people are in short supply. The cost of living is extremely high. Even renting a single room can push $1,000 a month. However, there are people who are beating the odds. A woman we met on our last visit was the store manager for a famous photographer by day and hotel concierge by night. Eventually, that store shut down. She began to sell her own artworks, first in the local weekly flea market while tending to two children still in diapers. Eventually, she saved enough money to rent a shop in a low cost section of the island. Her husband was able to quit his job at one of the famous hotels and join his wife in the family business. Now, she sells paintings, prints, photographs, and even wearable art she has created. Recently, she made her first step into a larger world, hotel d├ęcor. One of the hotels on the island is going to put her artwork in every room in the building. She insisted on doing this without using a professional hotel decoration company as a middleman. She gets to keep all the money generated by her talent.

How cool is that!

Thursday, January 12, 2017

Know Thyself

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!