Friday, April 28, 2017

Diversified? Yes or No?

In the April edition of a newsletter written by Mathew Young, the author brings up an interesting point about achieving diversification through the use of low cost index funds, as championed by proponents of Modern Portfolio Theory (MPT) such as John Bogle, founder of Vanguard funds. While this method is undoubtedly the best way for the average investor to put their retirement savings on automatic pilot, it contains hidden dangers.

In previous articles, I have discussed the criticisms of Benoit Mandelbrot and Nassim Taleb, who have pointed out that MPT makes the assumption that market performance can be described as a normal distribution when, in fact, the actual data produces thicker tails than are found in a Gaussian distribution. This means the market is a more dangerous place than explained by MPT.

From my understanding, the problem comes down to what data to include and what data to exclude. This question can cause violent disagreements between rational engineers. If all the other 200 data points on a graph lie along a nice straight line, what caused the one point that is way off by itself? If a sleepy junior engineer working the night shift forgot to take his zeroes before making a run, the point should be discarded, but if the cause is unknown, it might be an actual system instability that appears under rare conditions that we don’t understand. In this case, not only should the point be included, but additional testing will be recommended to the sponsoring organization.

When this question occurred in financial decision making, hedge fund programmers using accepted statistical methodology made assumptions that, while mathematically correct, made no sense outside of academia. While an occurrence can be calculated as a once in 2,000 year event based on 50 years of data, trusting this result with real money in the real world is just the kind of madness that led to the crash of 2008. This story is examined in exhaustive and exhausting detail in The Plight of the Fortune Tellers by Riccardo Rebonato, an outstanding though difficult read.

Young notes that many investors choose to buy shares in an S&P 500 index fund that mimics the value of the 500 largest corporations on the New York Stock Exchange or NASDAQ. Sounds good? Well, Young points out that market value weighting factors used in the S&P 500 put 22% of your money in technology stocks, one of the most unstable sectors in the economy. Also technology stocks are notorious for paying small dividends. Over the course of many years, you can expect about ½ of the growth of your investments to come from the compounding power of dividends. Do you really want 22% of your money in one sector that doesn’t pay a good dividend? Young points out that Apple accounts for 3.65% of the S&P 500, an amount equal to the 100 smallest constituents in the index.

Remember what happened in the Dotcom bust in 2000. Companies such as the FANG stocks (Facebook, Apple, Netflix, and Google) that went up very fast in 2015, can also come down just as fast. The average price earnings ratio for the S&P 500 over the last 130 odd years is 16. Currently the FANG stocks have a price earnings ratio of 61.

Even if you are buying mutual funds rather than shares in individual stocks, it is still worth your effort to know what you are buying. Normally a quick Internet search will list at least the top 10 positions in a mutual fund. For example Vanguard Wellington, (VWELX) a managed fund that I have purchased for my own portfolio, lists the top ten positions as Microsoft, JP Morgan Chase, Chevron, Intel Corp, Wells Fargo, Alphabet Inc, Bank of America, Comcast, Chubb, and Merck. If this was my only holding, I would be worried about an overexposure to money center banks.

Wellington, my TSP-C Fund, as well as my personal holdings, all feature Chevron.

So, “Am I diversified?” is not always an easy question to answer.

An example of the holdings of a Vanguard Target Fund appropriate for someone around the age of 40:

Vanguard Total Stock Market Index Fund Investor Shares51.9%
Vanguard Total International Stock Index Fund Investor Shares35.0%
Vanguard Total Bond Market II Index Fund Investor Shares9.2%
Vanguard Total International Bond Index Fund Investor Shares3.9%

Thursday, April 27, 2017

Qui Cum Canibus Concumbunt Cum Pulicibus Surgent

In attempting to help others find their own path to financial freedom, I was surprised to learn just how important the company you keep is to the outcome of your life. Are the people in your life inspiring you, encouraging you, pushing you in a better direction or are they holding you down, keeping you trapped in a place where they are comfortable?

Walking the Swamp Rabbit Trail I have met a lot of people, who like me, are attempting to become a healthier person through regular exercise. These three examples all happened in just the last couple of weeks. I was cheered on by three members of the Furman women’s track team. A man in his late twenties with a body of chiseled steel told me that he found my presence on the trail in all kinds of weather an inspiration. A middle aged woman training for a half marathon slowed down long enough to get to know me better and encourage to keep fighting the good fight.

There are times when I am inclined to believe that anything moving slower than me is probably a rock, but even this old man with his arthritic knees has had the opportunity to encourage other retirees who are just starting an exercise program or are walking to recover from surgery or some kind of physical malady.

Any time you make a serious effort to better your life, some of your companions will become uncomfortable. They will tell you all the reasons you shouldn’t try and all the reasons your efforts will surely fail. The truth is they don’t want you succeed, because if you do, they will feel inferior.

When I first became serious about investing for retirement, a number of people told me the game was rigged against the little guy. They told me I would lose all my money. The fact is they were unwilling to make the effort to learn how to transform their above average salaries into an above average net worth. Some of these people slowly faded out of my life. Over time I met coworkers who knew more than I knew about the stock market and I started reading books by the masters. I began to share what I was learning with others. The more experienced encouraged me while trying to steer me away from potential mistakes. Eventually, I found that some folks were seeking out my counsel in an attempt to get far enough up the learning curve to feel comfortable taking some calculated risks with their money.

Like losing weight, increasing net worth is hard work. I have lost about 40 pounds over the last four years, but that required a lot of hours spent hoofing it up and down the Swamp Rabbit Trail. The stretch run to retirement took me about 10 years of concentrated, focused effort, but in that time I increased my liquid (excluding my house) net worth by something in the neighborhood of 700%. During that time I was slammed by the crash of 2008, just like everyone else. The fact is that in good times and especially in bad times, I need the support, encouragement, and yes, even the occasional kick in the pants from others to keep on keeping on.

Look at the people in your life. If you need someone to help you move up, I firmly believe in the old Chinese adage, “When the student is ready, the teacher shall appear.” Then your hard work can become smart work. It won’t happen automatically, but a chance encounter here and there with the right person at the right time led me to a better life. I am nothing special. If it worked for me, it can work for you.

P.S. In this post I have focused on positive possibilities that can change your life for the better, but remember:
"He that lieth down with dogs shall rise up with fleas"
Source unknown

Monday, April 24, 2017

The TED Talk Test

The other day in a private conversation, I was annoyed to realize that I was enjoying retirement so much that, to be honest, I was unwilling to make the big investment of time and energy necessary to move this blog from a part time ministry to a full time commercial product. I am certainly more knowledgeable than when I started the Silver Eagle Experiment and my writing skills have improved over the last nine years. I don’t expect any change in those trends, but when will I ready to try and jump to another level? Leaping into the unknown is always pretty scary unless a hungry bear is getting close to your leg. I felt that way when I left the saw chain factory for engineering school.

I jumped and never looked back.

While considering this conundrum, I came up with an interesting thought experiment. Let’s say you are given the opportunity to present a TED Talk. If you spend much time on the Internet, you have probably listened to at least one of these lectures. TED started as a conference presenting 18 minute lectures by people with amazing, inspired new ideas in the fields of Technology, Entertainment, and Design to an audience of movers and shakers. The presenters were not only given an opportunity to share their life’s work, but also a chance to begin to build a network of well positioned patrons and allies who could provide fuel for their passions.

Here is the deal.

You will be given the opportunity to present an eighteen minute lecture on any subject you consider important to an audience of 200 or 300 men and women of your choosing. They could be venture capitalists with hundreds of millions of dollars looking to invest in new products or services. They could be the managers and owners of publishing houses or broadcasting companies looking for new books to publish, movie scripts to produce, or ideas for TV shows. They could be powerful politicians and the donors who fund their campaigns. Your choice, but you only get one shot at the big time.

There is another bonus if you are successful. The best TED talks get millions of hits on YouTube and other services. You will not only have instant name recognition, but your dream will be granted Internet legitimacy.

Eighteen minutes is somewhere between 2,500 and 3,000 words depending on how fast you talk. I don’t even know what I would say that would differentiate what I am trying to do from a hundred others, some household names who have sold books and courses in the hundreds of thousands and others, who are anonymous bloggers just like me. Let’s say that at some point I have the words. Then I would have to practice in private until I had the speech just about memorized. After that I would have to experiment with live audiences to perfect timing and delivery. If I had spent years learning the art of public speaking, it wouldn’t take as long, but it would still represent a major effort for anyone.

David didn’t hit Goliath with the first stone he ever placed in a sling. From having been a small boy who owned a sling, I expect that David’s major source of entertainment out in the sheep field was learning how to throw stones with that weapon. Unlike me, I expect he was also learning how to sing psalms and play the psaltery to avoid going mad with boredom. I could hurl a rock an enormous distance with my sling, but where it would land was anybody’s guess. A champion slinger could hit a target the size of Goliath’s head, at least most of the time. I saw this demonstrated on cable TV. I believe God put the rock between Goliath’s eyes, but I also believe that David’s skill is what landed that rock on the Giant’s head.

What would it take me or you to care about something so passionately that we would make the kind of effort it takes to jump whatever you are dreaming about to the next level? What kind of things would we do that others might find a bit crazy, because we cared so much we couldn’t help ourselves from trying just a little harder?

I heard a successful televangelist talk about the first days of his ministry. Once he rented a room and no one came to hear him speak. He went ahead and delivered his sermon to the empty room, in the belief that God had told him to do it and if no one else was listening, at least God heard it. I might question this man’s theology, but who can gainsay his determination?

Will I be ready to deliver my TED Talk when the opportunity presents itself? If I haven’t delivered it to a lot of empty rooms and at least 20 or so small audiences, I would expect the answer would be, “No.”

Sunday, April 23, 2017

Add Some Passion to Your Dream

Something rather unusual happened the other day. For the first time since I retired, I had the opportunity to throw some “new money” into the market.

Since I retired a little over four years ago, during most months we have lived on our renewable income and the mortgage payment we receive from the owner financed sale of our house in Maryland. In our case, renewable would be my wife’s early Social Security and my FERS pension. This has been enough to cover everything but extraordinary expenses such as repairs to the old house before the sale, the cost of moving to the new house, certain large tax bills, and that first-class vacation to Hawaii. On those occasions we dipped into our savings. After all, that is why we saved for retirement.

As an aside, let me add that when and how to take Social Security is a rather complicated question that requires an individual analysis before rolling the dice. First of all, you will have to guess how long you will live. If you take early Social Security at age 62 and die before roughly age 78, you win. If you wait until full retirement age, in my case 66, and die before 78, you lose. If you can wait until age 70, you can collect your maximum benefit. If you have longevity in your family, you might want to wait.

Or not!

The rules change all the time. In our case, we were able to flip my wife’s individual benefit to a higher spousal benefit at the time I started my Social Security at full retirement age. I had planned this maneuver with the understanding the rules might change before I reached 66. Then there is the question of necessity. If you are 62 and are unemployed, you might want to go ahead and take Social Security even if you believe you will live to 90.

After receiving my first three Social Security payments, I realized that my checkbook balance was higher than expected, as we were still living on renewable income and that monthly mortgage check. For the first time in more than four years, I had some new money. It reminded me of the years spent in the stretch run to retirement. I wanted to retire at the earliest possible date. Baring a winning lottery ticket, that would be the day after my 62nd birthday, the first day I could retire without a pension penalty. I remember how exciting it was to watch my version of a 401(k) growing with every paycheck. I was even more passionate about my self directed, after tax investments. When the balance went up in the checkbook, I would move some of that money up to our money market fund. I would tell myself stories about money that only moved in one direction—up, first from checkbook to savings, then from savings to investments in the stock market. This was almost always true except when we needed to buy a new car. Then money would move down from savings into the checkbook and off to the car dealer.

I was emotionally involved in my dream. I wanted to achieve my goal of early retirement so badly I could taste it. Think about times in your life when you were able to fuel a fantasy with your emotions. I expect this happened somewhere along the way to your wedding. It also happened to me when I was in engineering school. After nine years, I so wanted to get off the factory floor, that my academic efforts were fueled with passion.

Revisiting the memory of that feeling for even just a moment, as I purchased a small amount of a somewhat speculative stock, reminded me of how important passion can be in helping us to achieve our goals, but how to turn it on when we need it?

It seems like others are better able to hit our happy buttons for their benefit than we are able to tap into our emotional reserves for our own benefit. Last week I received a “private invitation” to experience a test drive in the new Alfa Romeo Giulia or Giulia Quadrifoglio, just the kind of car I would like to own some day. My wife had fun teasing me about this advertisement as she knows that although I am a logical researcher who reads Consumer Reports, a little passion will help in separating me from our money when visiting a car dealer.

If advertisers, marketers, politicians, and preachers know how to ignite a fire under our inertia, why can’t we learn to do it to ourselves? Tony Robbins correctly differentiates between the musts and shoulds in our lives. If it must get done, it will get done. Sometimes a should will get done, but often we find an excuse to avoid doing what we really know, in our hearts, SHOULD be done. The musts tend to be fueled with passion.

You Gotta Want It!

Saturday, April 22, 2017

Is It Working for You?

"In times of change learners inherit the earth; while the learned find themselves beautifully equipped to deal with a world that no longer exists."
Eric Hoffer

During their working years, the Baby Boom watched the covenant between workers and corporations that worked pretty well from 1945 until 1970 unravel. Besides oil shocks and the miseries of stagflation, we also experienced the deindustrialization of the United States that eliminated approximately 20 million good paying, relatively stable jobs with benefits for Americans of average ability. On the plus side we had a good run between the end of the recession in 1985 and the dotcom crash of 2000. The Internet and cell phone revolutions generated a lot of new wealth, unfortunately not as many new jobs, and we came to believe that the value of a house could only go up. We experienced a lot of change over the last 45 years. Much of it wasn’t good.

Unless our country changes direction, the future doesn’t look too hot for the Millennial Generation. Globalization, personal and public debt, and new jobs that require above average ability in technical areas that are in demand, entrepreneurial skills, or sales aren’t going to help someone with a high school diploma and no particular talent.

You’ve read the news. Too many Americans, including an unfathomable number in the top quintile are living paycheck to paycheck. Surveys indicate that 46% of households couldn’t cover a $400 emergency without borrowing the money. If it isn’t working for you, you had better become open to the idea of becoming a learner.

Get another degree, get a better job, worked for me, but I don’t expect that will work in the future, unless we are talking a M.D. Starting around 1973, our country started producing more college graduates than new jobs requiring a college diploma. Even in my case, my last degree really didn’t kick me to a higher pay grade than what I would have achieved without it. However, about the time I turned 50, I set out on a different kind of learning quest to discover the secrets of investment, so that I could retire comfortably some time before my death.

Given the rate of change in our economy, I don’t expect that I will be able to quit learning until I am dead or declared incompetent.

Your relationship with money isn’t exactly like your relationship with other humans, but the emotional indicators are remarkably similar.

If you are experiencing:

Fear
Anger
Hate
Blaming others
Guilt
Shame

Chances are you need to change direction.

If you are experiencing:

Peace
Joy
Love
Equanimity
Forgiveness
Generosity

Keep on doing what you are doing, but don’t miss the opportunity to explore new paths.

The basic facts of money, like the rules of chess are quite simple. However, learning to apply them with skill is the work of a lifetime. Studies indicate that chess is a game that is controlled, 100%, by the skills of the players involved. At the other end of the spectrum is the lottery, no skill, 100% “luck.” Good luck and bad luck tend to balance out over the course of a lifetime, just as the best teams in football tend to play in the Super Bowl, even though football (like investing) is maybe something like 20% luck.

Don’t be a victim. You can do this. The first steps are easy enough to learn. Go to the library. Dave Ramsey and Suze Orman are the big names, but the shelves are filled with introductory personal finance courses offered by authors from every social, religious, and cultural perspective imaginable. If you are a bit of a counter culture artistic kind of person, try “Your Money or Your Life by Joe Dominguez,” a classic. Be sure and get a recent edition, the investment advice found in the original has been seriously overtaken by events.

Money is just a tool, not an end in itself. The purpose of earning and saving more money is to make a better life for yourself, your family, your community, and your world. Your feelings, as well as your bank balance will let you know where you need to focus your efforts in learning how to improve your performance in this very important dimension of a balanced life.

Friday, April 7, 2017

Stories are Only Words--Unless You Believe Them

The “nuts and bolts” of personal finance are really pretty simple, requiring nothing more than third grade math and a copy of the golden rule. Don’t spend more than you earn. Put a little something in savings every time money crosses your palm. Try to cultivate a generous heart. If you want to earn more money, look for opportunities to be a greater blessing to your neighbor. Why then do so many people suffer from financial distress? I can sit down with someone and work through a monthly budget, but I can’t get them to believe that living on a budget or starting an emergency fund is a reasonable possibility. I have come to the conclusion that the stories we believe are ultimately what limit our chance to reach financial freedom, whatever that means to you.

Recently while listening to a lecture on finding financial freedom the teacher suggested, “Imagine looking into a mirror while saying, My greatest fear concerning money is…” The class dutifully repeated the first part of the assignment and then broke into self conscious nervous laughter. With a little more prompting, the braver members of the class shared their greatest fears. For me this was a spooky experience. As I said, “My greatest fear concerning money is,” I spontaneously visualized my parents standing behind me with their arms crossed and expressions of disapproval on their faces. My mother is dead. My father is suffering from Alzheimer’s. Sadly, I don’t think he even knows he has a son. Why is that story bubbling around in my subconscious mind, even though I am comfortably retired and write a Christian personal finance blog?

If the stories you tell yourself about money aren’t true and useful, you need to make an effort to find a better story. If the stories are both true and useful, hang on to them until you find something better. There is always a better story.

Consider an unemployed coal miner living somewhere in rural West Virginia: If he makes the statement, “The mine is closed. I will never find another job that will pay enough to support my family,” might prove to be a true statement if he remains in his home town, but is it a useful story? It gets worse. As we tell ourselves these stories over and over again, eventually we begin to identify with our stories. In this instance, this man might come to say, “I am an unemployed coal miner.” Identifying with our own story can become deadly. If I am a Type II Diabetes patient, a cure would destroy my self identity. Did you notice I said my father is suffering from Alzheimer’s? The disease is not my father. Your problem is not you.

Liberation is a possibility, but it will require a different story.

Richard Branson, founder of the Virgin Group wanted to be an entrepreneur from a very early age. He sees possibilities where I would see only problems. Once after his flight from Puerto Rico was canceled, Branson chartered a small airplane and sold tickets to his fellow passengers to cover the cost. I would have cursed my bad luck and tried to get seat on the next available plane. For Branson, this was the inspiration for Virgin America, a small but growing niche airline. Branson told himself a story about how easy it is to make money so many times that he came to believe it. His net worth is something like $4.5 billion, not too bad for a kid selling records at a discount price. This got him into legal hot water, because the price on some of those records was protected by marketing agreements that limited discount sales. Well, his headmaster correctly predicted that Branson, a poor student with learning disabilities, would either end up in prison or become a millionaire.

I have a friend who invests in rental properties. When he looks at a dilapidated little house requiring $20,000 in repairs and remodeling to make it habitable, he sees nothing but opportunity. He tells himself a story. The people who rent this house from me will not only pay the mortgage, but they will give me the house for free after they finish paying off the mortgage. I tell myself stories about broken toilets in the middle of the night and tenants who will throw parties for their biker boyfriends.

Same property.
Same cost and opportunity.
Different stories.

Go ahead. I challenge you to look into the mirror and say, “My greatest fear concerning money is…” Write down the answer. Then continue to write down the stories you tell yourself about money. Without judging or blaming yourself, examine the truth and utility of your stories. Are they based in scarcity, fear, anger, resentment, envy or greed? Chances are they will produce fruit that you won’t want to eat. If they are based in possibility, abundance, generosity, good-will, and happiness found in the success of others, your stories are likely to carry you a long way towards financial freedom.

Stories are only words and words can be changed.

Tuesday, April 4, 2017

If Only You Believe in Miracles

Sometimes miracles aren’t a big deal, unless it happens to be your miracle.

Last week, while I was out walking on the Swamp Rabbit Trail, I saw a plastic card sitting on the pavement. It turned out to be a live debit card issued by one of the major banks. After finishing my daily exercises, I drove over to the closest branch office of that bank. It was out of my way, but what is an extra 10 or 15 minutes? I gave the card to the branch manger who assured me he would immediately call the owner of the card and give her the good news. If she knew she had lost that card, I would expect she was praying for a miracle. If not, I imagine a brief prayer of thanksgiving passed through her mind when she received the branch manager’s phone call. I didn’t do anything remarkable. It didn’t even cost me $1.00 in gasoline, but for someone I will likely never meet, it was a miracle.

As part of my morning ritual, I watch a lecture or sermon on Youtube while drinking a cup of coffee. While listening to the King of Las Vegas, Steve Wynn opine on the secrets of running one of the three greatest hotels in the world, it occurred to me that much of what Steve was promoting could be used by churches. His managers collect stories about employees who went the extra mile to make a guest’s experience—extraordinary. The story appears almost immediately on the Hotel Employee Internet. Within a few hours, a large photograph of the hero of the hour appears on the wall in the employee area. As a result, employees are actively looking for an opportunity to get their name up on that board by providing the highest quality service in the world.

Joel Osteen believes in miracles. He not only tells his congregation to expect miracles in their lives, he encourages them to look for opportunities to, “Be a miracle for someone else.” When he hears about a member of Lakewood who has done something—extraordinary, whether it was something large, like starting a ministry for children with autism that has gone nationwide, or something small like driving an old lady to church every week for several years, they get an atta-boy from the pulpit. Sometimes Joel names names and puts the camera on miracle worker. Sometimes they remain anonymous, but he gives enough details that the person receiving the complement and their friends know who Joel is talking about.

What if I started every day with a prayer, not only asking God for my needs, but asking him for an opportunity to be a miracle in another person’s life? Having had the opportunity to be a miracle here and there over the course of my life, I have learned that it is a blessing to be a blessing. It also seems that there is, at least some correlation between being a blessing and receiving a blessing.

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!

Wednesday, January 4, 2017

No Answer

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?