Stupid Smart People

Note: A version of this post appeared in the San Antonio Express News

jedi_council

My wife and I headed East on I-10 recently to visit our New York City friends Jay and Nina – another married couple and their kids – who now live in Houston.

The conversation over the weekend turned toward their personal finances and Jay began calling himself a ‘stupid smart person’ when it comes to the world of finance and their own personal financial situation. I really like that phrase.

Educational background

As they approach their 40s, they’ve realized they had no idea where to even begin.  While they have now begun to learn, they mostly recounted to me just how unaware and mistake-prone they had been, until very recently.

Jay calling himself ‘stupid’ needs some explanation, as his self-deprecation should only be understood ironically.

Jay and Nina both graduated from Harvard College, then Columbia and NYU medical schools, and finally Columbia Medical residency programs.

They continued training as cancer specialists at MD Anderson Medical Center in Houston – one of the most educationally advanced institutions on this, or any other, planet.

Between them they share three Ivy League degrees, as well as approximately 20 years of specialized education, after college.

I would expect they have enough higher learning to earn an invitation to the Jedi Council by now, so how can my smart Houston friends be – by their own description – stupid?

Clearly, they are not.

Harvard_Wreath_Logo

But if even they don’t get it…

You might be thinking that if even my friends Jay and Nina don’t feel confident about understanding their personal finances, how does anybody else even have a fighting chance?

I’ve known far more people uncertain about their personal financial situation than I’ve known people who feel totally confident that they can handle their own money.

I’m describing my friends’ specific situation not to pick on them. They’re on the right track now. I’m bringing this up because I hope their situation gives everyone permission to do two things.

First, it’s ok to feel like you do not know enough about your personal financial situation – even my Jedi Council friends felt clueless.

Second, it’s ok to begin the process of self-education about your finances at any time, even long after you’ve become an expert in your own profession. It’s not too late. Even for you.

What is it about money and finance that stumps even the most brilliant among us?

I don’t know yet. I’m still trying to figure this out.

This is one of life’s great mysteries. Just like why C3PO never said anything to Luke about his father, since the droid was created by him? Seriously what’s up with that?

In honor of my team making the Super Bowl, I decided to put up a picture of Coach Belichick
In honor of my team making the Super Bowl, I decided to put up a picture of Coach Belichick

The Finance Industry, like a Sith, wants you in the Dark

My answer about money so far comes from my Wall Street experience: The finance industry – taken as a whole – has a vested interest in making financial services seem as complicated and opaque as possible.

The more specialized and mysterious we can make it all seem, the thinking goes, the more we can charge extraordinary fees for very ordinary services.

I think we fear that simple financial solutions would lead to lower fees, and I’m sorry to say but lower fees are just not getting me the Mazarati Quattroporte I’ve always wanted.

Landspeeders on Tatooine don’t come cheap either.

 

Simple beats complicated

So what is a stupid smart person to do?

Start with the following true (ok, more like “truthy”) statistic:

In 98.75 percent of all financial situations simple beats complicated 100% of the time.

Got it?

How do you increase your chances of choosing “simple” over “complicated?”

Easy.

jedi_council_legos
Keep it simple, even for Jedis

Embrace your identity as a stupid smart person.

For example, only make investment choices that you – a stupid smart person – actually, fully, deeply, simply, understand.

Here’s a good test: Could you, personally, explain your financial and investment decisions to a fifth grader?

If your insurance salesman cannot tell you precisely, in language even you can understand, how that whole life policy or variable annuity is a better deal than just taking the money and putting it into a retirement plan and thereby ‘self-insuring’ – and believe me he can’t, because it isn’t – then you don’t need that particular type of insurance product.

If your mortgage broker cannot explain exactly how that interest-only, variable-interest reset loan to LIBOR + 8% in three years is a good option for you – and believe me he can’t, because it isn’t – then you need a simpler mortgage.

None of us need a stack of Ivy League degrees to get a grip on our finances. And even having the degrees does not ensure financial sophistication. So just forget the sophistication part and concentrate instead on doing only what you can understand, and then work to understand what you’re doing.

I get it that encouraging you to be a stupid smart person may leave you feeling confused: I’ve told you what not to do, but not yet what you should do.

Patience, my Padawan learner, patience.

padawan_learner
It’s amazing the awesome things you find when you Google Image “Padawan Learner”

Early still it is.

 

 

Please see related posts:

Use Jedi mind tricks to save money

Go for simple over complicated with retirement plans

Book Review: Simple Wealth, Inevitable Wealth by Nick Murray

 

 

 

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529 Accounts and Tax Fairness

Tax changesPresident Obama recently announced a series of tax changes he will propose or at least politically push for in the coming year.

Since the US Congress constitutionally controls the power of taxation, and Congress likes Obama as much as I like Pete Carroll’s Seahawks, I understand that Obama’s priorities may not come to pass any time soon.

Still, I got mad when I read this week that Obama proposes ending the tax advantages of 529 education savings accounts.[1]

seattle_seahawks_suck
I like Seattle like Congress likes Obama

My first thought: “That’s not fair!”

My second thought (and one of my favorite family mottos): “’Fair’ is for kids.”[2]

My third, kind of extended, thought: While nobody actually enjoys paying taxes, a key test of the acceptability of a tax is whether it seems ‘fair.’ And tax breaks, just like taxes themselves, also have to seem, and be, basically ‘fair.’

How do we know if something is fair? It depends a tremendous amount on which taxes one pays and which tax breaks one takes advantage of.

In the case of 529 education accounts, I had always considered them an extremely fair tax break, combining one virtue (long-range savings) with another virtue (higher education) with compound interest (the greatest of all possible things in the known universe).

529 accounts

But of course, 529 accounts are fair, to me, because I’ve started them for my young girls. I appreciate and value the tax break on future capital gains because I have a chance to benefit from them when my girls go to college.[3]

For people who haven’t started 529 accounts, or have no chance of investing for their kids this way, the tax breaks may appear targeted at some unattainable upper-middle class, college-bound elite, and therefore the tax break is inherently unfair.

I was interested to read yesterday in the Wall Street Journal the White House’s argument that 70% of benefits of 529 accounts go to households with incomes over $200,000, or the top 4% of tax returns. I hadn’t known that, nor had I imagined the benefits of 529 accounts were enjoyed by so few.

In the light of that data, my fair tax break seems a little less fair. Or at least, it seems like something that could be eliminated and replaced with something that would have a broader benefit.

Not that it’s going to happen anyway, because Obama doesn’t make tax policy, Congress does.

 

PS – 4 days after I posted this, Obama backtracked and said he won’t push for a change in 529 Accounts, after taking flak from both Dems and Repubs.

 

Please see previous posts on 529 Savings such as:

Compound Interest and College Savings

The insanely rising cost of college – Interview with a College Advisor

Is the financial model for college broken – Part 2 of Interview with College Advisor

College Savings vs. Retirement Savings

 

And previous posts on taxation such as:

Shhh…Please don’t talk about my tax loophole

Adult conversation about tax policy

 

[1] Importantly, on the issue of fairness, Obama proposed eliminating tax breaks for future investment growth obtained on contributions to a 529 account, not for investment growth on past or existing investments in 529 accounts. In other words, there’s a grandfather clause for existing 529 amounts, a common key ‘fairness’ element to taxation changes.

[2] My favorite kid and ‘fairness’ story in my family, which I’ve mentioned in another post: My then-4year-old niece told us all over dinner “It would be fair, to me, if you gave me a bubble bath after dinner.” She knew fairness mattered to adults, and tried to shoehorn her interest in bubble baths into an adult framework. She’s seventeen now and soon off to college. Cool kid. Ever after, I try to use the “It would be fair, to me…” argument with my family as much as possible.

[3] Here my wife and I always add “should they choose that path.” Because they may decide instead to run away with the circus. My older one is pretty good on the rings at the gym.

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Groan-Worthy Market Commentary

facepalm_punsHelium was up, feathers were down.
Paper was stationary.
Fluorescent tubing was dimmed in light trading.
Knives were up sharply.
Cattle futures steered into a bull market.
Pencils lost a few points.
Hiking equipment was trailing.
Elevators rose, while escalators continued their slow decline.
Weights were up in heavy trading.
Light switches were off.
Mining equipment hit rock bottom.
Diapers remain unchanged.
Shipping lines stayed at an even keel.
The market for raisins dried up.
Coca Cola and Pepsi both fizzled.
Caterpillar stock inched up a bit.
Sun peaked at midday.
Balloon prices were inflated.
Scott Tissue touched a new bottom.
And batteries exploded in an attempt to recharge the market.

 

I borrowed this from David Hultstrom’s newsletter, which everyone should subscribe to here. Hultstrom says author unknown.

 

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A Confusing Puzzle Made Simple – Retirement Plans

A version of this post ran earlier in the San Antonio Express News

paradox_of_choice

I recently received in the mail retirement plan documents for a local employer’s 403B plan.

I’m going to spend the first part of this column complaining about this 403B plan provider. Later, I am going to offer a better, simpler, version of the plan. And that better, simpler, version of the plan will make 99.5% of all investment advisors throw up in their mouth. But they are wrong and I am right.

But before I complain

Let me start with an important public service announcement first:

403B plans and 401K plans – employee-sponsored, tax-advantaged retirement accounts for non-profit and for-profit employers respectively – are Totally. Freaking. Awesome.

If you have access to one of these through your job, and you are not taking full advantage of these accounts, then drop your newspaper or iPad right now – seriously, right now – and call your HR department and sign up for automatic payroll-deduction investing.

Do it. I’ll still be here when you get back.

What are you waiting for? I said I’ll be right here.

Go!

Ok. Are we good?

Now then, my complaining

I received in the mail this packet entitled “important information about your retirement plan,” consisting of 42 pages, printed on double-sided paper and in small letters. You might be able to guess where this is going.

The problem

I’m bothered not by any deficiencies in the plan, but rather, the opposite. The document provides a gold-plated menu of options.

The problem is that anybody except a sophisticated financial professional would find the choices totally overwhelming.

I did some simple addition and this is what I found:

141 mutual funds of 100% stocks;

38 mutual funds of 100% bonds;

41 mutual funds with a blend of stocks and bonds, in varying proportions;

6 money market mutual funds; (By the way, this is perhaps the most ridiculous part of the whole list.  A money market fund is a money market fund is a money market fund. You don’t need 6 to choose from.)

6 fixed return investments;

1 lifetime annuity investment;

And a partridge in a pear tree.

Hello? Is anybody there? This makes me so mad.

Paradox of Choice

These choices make no sense. You would think the designers of this 403B plan had never heard of the behavioral finance theory known as the ‘paradox of choice’ idea in retirement planning.

too_many_choices

Behavioral economists have shown that the more mutual funds you offer, the less likely people are to actually invest in anything. We tend to choose instead to delay decision-making to some later date. And that delay, in the case retirement planning, is a horrible outcome.

An economist’s study using data from fund company Vanguard showed that for every additional 10 mutual funds offered in a retirement plan, the rate of employee participation in the 401K and 403B programs declined 2%.

If you offer 50 additional funds for example, we would expect 10% fewer employees on average to participate in their retirement account.

The decision – due to confusion – to defer contributing to some far-off future date may cost you millions of dollars in your retirement. I’m sure the friendly folks in charge of designing this 403B plan felt good about offering so many choices because, hey, more choices are better, right?

Unfortunately, not when it comes to encouraging people to invest in their retirement accounts.

My solution, as DRAGO

Sometime in 2035, when I am elevated by President Miley Cyrus to the post of Dictator of Retirement Account Great Options (You can just call me DRAGO, for short) there will be two – and only two! – funds to choose from.

miley_cyrus_patriotic
Miley Cyrus is a Patriot

In this way I will maximize your participation.

Risky and Not Risky

I will call these two funds Not Risky, and Risky.

Not Risky will never lose you money. Not Risky will provide you between 0 and 2% positive annual returns year in and year out. It will also never make you any money on your money, especially after taxes and inflation.

If you have 10 years or more until your retirement (a key ‘if!’) Not Risky is totally forbidden for your retirement account.

Risky, by contrast, is quite volatile. You can lose as much as 30% of your investment in one year. You can also gain as much as 30% in one year. Viewed over long periods of time, Risky has returned about 9% per year in the last century. Risky is also the only way to actually grow long-term wealth with your retirement account.

In the future with Risky, you should reasonably expect no more than 6% annual returns, over the long run, with tremendous volatility in the short and medium run.

But after taxes and inflation, Risky offers you a far better return on your money than Not Risky, many, many times over.

Finally, as your DRAGO, if you have more than 10 years to go until your retirement account (a key ‘if!’), I will force you to only have Risky in your portfolio.

Retirement money for most of us, remember, is long-term money. For most workers in their 20s, 30s, 40s, and 50s, retirement is more than 10 years away.

Only if you plan to retire within the next ten years (a key ‘if!’), will DRAGO allow you to invest in a blend of Risky and Not Risky.

In this way, I will maximize your wealth in retirement.

You can thank your DRAGO, as well as President Cyrus, for this important service and improvement in your quality of life in your retirement years.

 

 

please read related posts:

Stocks v Bonds, the Probabilistic Answer

Book Review of Simple Wealth, Inevitable Wealth by Nick Murray

 

 

 

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Art Lessons For Business

A version of this post ran in the San Antonio Express News

found_marble

You know what’s hard about producing art?

Getting paid.

I don’t usually turn to the art world for my lessons on business, but I’ve been thinking lately about San Antonio glass artist Justin Parr and what he’s been doing with the “Esferas Perdidas” project, a model for creating financial value for art.

For the Spanish-language-challenged among you, “Esferas Perdidas” means “lost spheres.” Parr and fellow glass artist Sean Johnston, along with their glass artist mentor Jake Zollie Harper, began in January 2014 posting pictures of their large glass marbles on Facebook, with a “Lost” announcement, and photographic clues as to where, in the San Antonio area, seekers could find the artistic treasure.

A hunt among glass marble enthusiasts follows, typically with a follow-up “Found” posting of the marble, often with the obligatory happy selfie-with-marble posting by the fortunate treasure-finder.

In the months since their launch, and in particular after a prominent photographic slideshow in the San Antonio Current, the community of marble keepers and marble seekers has grown quickly. Currently at about 5,300 Facebook members and counting, a constant stream of participants is losing their marbles over this game.

A little while ago I happened to be sitting with Parr, sharing a fermented beverage at his favorite watering hole The Filling Station in the minutes following a “Lost” posting on Facebook.

“Here they come,” he commented mildly, as a woman dismounted and leaned her bicycle against the outside of the building. She began closely inspecting the landscaping, checking under the picnic tables and lifting up used food trays.

Soon a pickup truck pulled into the driveway, and out jumped a bearded man, a friend of Parr’s.

“He’s here for the hunt as well.”

A few more arrived before the first woman announced her find.

“It was in the palm tree!”

Selfie snap, upload, “Found.”

“Nice work.”

The slow-motion mini flash mob dispersed over the next five to 10 minutes.

When another artist and hipper-than-thou friend of mine complained publicly about the “commercialization” of the “Esferas Perdidas” project, Parr responded with a commercially friendly post that I’d summarize as “Who cares?”

Parr’s marbles normally retail for between $25 and $300, but the “Esferas Perdidas” project has expanded the market for his and others’ work.

I see three possible business lessons for the art world from the “Esferas Perdidas” project:

1. Help build a community that values your art, but let the community make their own rules.

2. Create a back story for your art.

3. Give it away for free, and a paid market may develop.

Parr is thrilled that many glass artists — not just the project’s founders — can get paid more, and more often, for their work following the “Esferas Perdidas” project.

glass-blower-sean-johnston
Glass blower Sean Johnston

Parr watches prices online, noting that San Antonians often dominate the national marble auction market in the wake of the project. At the highest end of the marble market, collectors pay up to $3,500 for the work of master marble maker Yoshi Norikondo.

Community rules

Parr’s fascinated that the community of “Esferas Perdidas” fans has taken a simple idea that he and his fellow glass artists had and have developed a set of unwritten community rules and mores around hiding, finding, posting, and valuing his art. He’s flattered that “Esferas Perdidas” communities have sprouted in New Jersey and the Pacific Northwest.

Back story

Part of the value of certain art and collectibles of course has always derived from the back story. Philatelists salivate over the British Guiana 1c Magenta in part because of the back story of war reparations, elaborate auctions and burned copies.

This "1 Cent Magenta" last sold for $9.48 million in 2014.
This “1 Cent Magenta” last sold for $9.48 million in 2014.

Every time one of Parr’s or his fellow artists’ “esferas” goes “perdida,” seekers have an adventure that creates a particular story and memory for the item. I assume this ups their value permanently.

The first ones for free

In addition, the fact that some marbles can be obtained free, through the personal effort of the hunt, in no way has lessened the demand for the purchased kind. On the contrary.

Parr says that many participants in the community pay full price for newly created marbles for the intended purpose of hiding and giving them away to others.

I’m fascinated by the “give it away for free” model that they’ve employed.

I’m intrigued by the “catalyze the idea” but then let the community determine what happens next with your art, or with your product.

And I’ve got to be happy when artists move closer to getting paid full value for the art they love to produce.

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Radio Appearance On The Cost Of Attracting NFL Team To Town

I participated in a radio discussion yesterday regarding on public radio KSTX ‘The Source,’ hosted by David Martin Davies, on the likely cost of attracting an NFL team, to move to San Antonio.

NFL owners in the last few decades have come to expect extraordinary public subsidies for their privately owned businesses. I estimated earlier in the week that San Antonio would have to start with a $500 million-type figure to get the conversation going with Mark Davis, the owner of the Oakland Raiders. I think that kind of public money deserves a bit more public discussion than it’s been getting locally.

Other guests on the program included UTSA professor Heywood Sanders, ESPN Columnist and author Gregg Easterbrook, and author Neil deMause.

oakland_raiders
Raiders of our pocketbook

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