Feeling Broke Feeling Whole

As a rule, I prefer having more money rather than less. I share this preference with 99.97 percent of basically everybody.

Especially in this period between Thanksgiving and Christmas we feel the need for more money most acutely.

The American poet Marshall Mathers – in his well-known Cri de CoeurMockingbird” – aptly captured his shame at Christmas time – lacking enough money to pay for any present for his daughter Hailie. Mathers managed to escape poverty through the commercial success of his poetry – and a now-mythical timely visit to fellow-poet Andre Young in California – but he continues to mine the shame and anger of those early penniless years throughout his entire oeuvre.

My life diverges in important ways from Mathers’, but the theme of spiritual opportunity through financial struggle – especially at the holidays – is what I plan to talk about today.

What I am leading up to is the contrarian statement that occasionally a lack of money, even at Christmas, can be a blessing in disguise. We don’t want less money. We’re not seeking less money. But there can be a silver lining to less money.

Of course we’re all familiar with the idea that money isn’t everything. We even occasionally remember that concept during the holidays, despite the crush of commercialism between Black Friday and the post-Christmas sales. No doubt everyone recalls O. Henry’s Gift of the Magi. Which is cool.

But if you really want to feel better about the season, check out my idea below, inspired by my own lack of money.

College

In college I was, appropriately, broke.[1]

My money problems at the time, however, pushed me to devise a clever, self-serving proposal that I made to my entire family. My self-serving solution, in turn, inspired the best family Christmases ever.

eminem
Just a meta M and M joke picture

Perhaps if you’re feeling broke around the Holidays you’d like to try this at home as well.

My proposal

I wrote a letter to my family, around Thanksgiving-time 1994, requesting that we call a moratorium on purchasing presents for each other at Christmas.

In my letter, however, I emphasized that I didn’t want to leave my family with misery and emptiness on Christmas Day. Instead, I proposed we randomly pick one family member’s name out of a hat and each have the responsibility for making something by hand for that one person. For the rest of the family members – including between spouses – we were not to give any other gifts.

You see, my older brother and sister, already married at the time[2] and better established in the world, could afford to buy everyone in the family pretty good presents. That put me at a huge disadvantage. Even a nice pair of socks would have meant spending money I didn’t have, while expensive socks for everyone in the family would have broken my bank. I needed this moratorium.

The only stipulation for the one gift was that it must be primarily home-made. The essence of the gift could not be bought anywhere.

At first, since my main goal was to save myself from spending money I didn’t have, I didn’t think much of the ‘home-made’ gift thing. It just seemed thrifty and affordable, and therefore worthy of proposing.
I think my Mom came up with the beautiful internal-family marketing hook, however, that started to transform my self-serving idea into greatness.

The home-made gift would be called the ‘spiritual gift.’

See, ‘Spiritual Christmas’ is a genius idea. And, as it turned out, an apt description.

Spiritual Christmas

Would you like to cry happy tears on Christmas morning? How about, if you have kind of a WASP-y New England-y non-emotive family?

Try making something by hand, write a note about it, and then read that note out loud to your family member in front of everyone. Guaranteed instant waterworks.

More than twenty years later, I still remember the spiritual gifts in those early years.

Order extra tissues

My brother-in-law cooked a meal in tribute to my mom (the matriarch) and her usual role as chef extraordinaire to her entire brood.

My brother wrote an emotional letter to my father, comparing him to a high-end bottle of scotch. I know that sounds very WASPy, but believe me, it was awesome. He said all the things you’d typically hear in a eulogy, but my Dad was able to hear it. A distinct advantage, by the way.

Sometimes I misfired, like when I promised to build a website for my mom in 1996, but just couldn’t figure it out. Not so good at the coding here. Neither am I a crafts-y person, but I do like to write. In reading my gifts out loud during Spiritual Christmases inevitably I’d break down by the second line, and the rest of the room quickly followed my lead.

I mean, how often do you tell your family members exactly and directly and in detail how much you love them, and say it out loud for others to hear?

These days

I hope you’re not disappointed to read that when my nieces, nephews and then my own children came along, we reverted back to a good old-fashioned ‘Murican Christmas, full of American Girl dolls, action figures, and materialism. Still, I firmly believe Spiritual Christmas is the best Christmas.

If you feel broke, try this.

Or even better, if you’d like to feel whole again: Declare a moratorium on store-bought gifts, announce it’s spiritual gift time only. Let the happy weeping begin.

dilbert christmas

 

[1] Democrats and Republicans, old and young, North and South, I think we can all agree on one thing: rich college kids are the worst. Amirite? Just classic movie villains.

[2] not to each other, silly.

Post read (464) times.

Tiny Person’s Tiny Piece of a Big Company

disneyMy 5-year old daughter recently visited Disneyworld.[1] My main message to her, before she left, was to “make sure you do some financial due diligence while you’re there, maybe you want to buy some stock in Disney?”

What? Like you wouldn’t give the same message to the 5-year old in your life?

A week earlier, I’d asked her if she wanted to take all the money in her bank account – mostly earned by losing teeth plus birthday/holiday gifts – and buy stock in a company.

She replied with an enthusiastic “NO!” I breathed deeply and silently recalled to myself the Jack Handey classic “The face of a child can say it all, especially the mouth part of the face.” Kids are so funny sometimes. Also, easily ignored.

Anyway, as I prepared to help her buy her first stock, this Disney trip came up, which explains my due diligence request.

I had already forced my older daughter – now 10 years old – to invest her bank account in an individual stock two years ago, and she’s grown her money by about 20% since then. Not bad, not bad. I explained those long-term prospects to my youngest, and she began to get a bit more interested.

Her excitement

By the time she returned from Disney (as I had evilly predicted) she was ready to buy shares.

I asked her how the trip went. Was it magical? Did you meet any princesses? Can you update my forward projections for Q1 2016 EBITDA, based on weather-adjusted, retail foot-traffic model per square footage? (I kid, I kid.)

Then I asked my real question.

“Now that you’ve seen Disneyworld, do you want to buy a little piece of it?” I asked a few days ago.

“No Daddy, I want to buy all of it!” she replied. (Good girl! A touch of megalomania underpins many great investors.)

“Also, Daddy, I want grow my money” she added. (Yes! Internal Daddy fist pump!)

“Also, at night when nobody is there I want to ride the rides.” (Ok, we’ll see. I can’t promise that.)

DPPs, DRIPs

One thing I like about Disney stock for my daughter’s first stock purchase is that they offer – like many other megasize companies – simple conveniences for long-term buy-and-hold investors. Specifically, two things:

  1. The chance to purchase stock directly from the company via a DPP (Direct Purchase Plan) rather than through a broker.
  2. A DRIP program (short for Dividend Reinvestment Plan) that purchases additional fractional amounts of shares with each quarterly dividend.

Many other companies besides Disney also offer DPPs and DRIPs, and I recommend visiting sites like Shareowner, Computershare, and Broadridge to see extensive choices in public companies offering DPPs and DRIPs.

DRIPs

When I began the process of setting up a direct purchase through Disney, another issues arises, namely the creation of a Custodial Account, known as an UTMA.

What the UTMA?

Children in Texas (where we live) may own stocks through an UTMA (Uniform Transfers to Minors Act) account, which means an adult in their life gets to make all the investment decisions, but that control of the money reverts to the child upon turning twenty-one years old. I mention this not because it’s interesting or relevant to my 5-year-old, but just for you old folks contemplating something like this and wondering about the mechanics of it all.

My priorities with investing

I will not show my daughter the price/earning ratio, the annual report, or review senior management, at least for a dozen more years. I will not show her a chart of stock prices, as I’m not going to teach her to ‘trade’ stocks. There is no ‘trading stocks’ in my universe.

Also, for the record, I don’t even think most adults should bother buying individual stocks, as a diversified stock mutual fund probably does a better job of growing our money in the long run. In that sense, I only recommend individual stocks for kids as a learning experience.

All I care about with this exercise is teaching her three things.

  1. You (little tiny you!) can be an owner of a small piece of big companies. Even (especially!) an owner of companies we buy stuff from.
  2. When you’re an owner, the company shares their profits with you every year.
  3. Over a long period of time your money can grow on your money, And that money-on-money growth is a lot easier than working!

The fine print

A couple of additional small-print notes: Kids, obviously, don’t deserve free money. A cooler way to do this would be via an IRA if your kid has legitimate outside-of-the-home income (mine doesn’t). I’m not a lawyer and this isn’t legal advice. I’m not a CPA and this isn’t tax advice. For that matter, I’m not even an investment professional and this isn’t investment advice. Disclosure: Outside of this $500 Disney investment for my kid I don’t own any Disney stock. Fuller disclosure: As a household we own dozens of princess dresses, mostly of Elsa.

 

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

Please see related post:

 

Daughter’s First Stock Investment – My terrible awful idea

How To Invest

 

 

[1] She traveled with the rest of my family – minus me – because I don’t do Disneyworld.

Post read (896) times.

Financial Readiness – My 5 Stages of Grief

financial_readinessMy personal bank – which also offers insurance and investments – recently invited me to discover my ‘Financial Readiness’ score, available in five minutes by taking a quick online survey.

Now, I am a competitive person who likes to win. For example, I know my SAT scores from high school, as well as my fastest one-mile and marathon racing times, by heart.

As a finance guy, I knew I would rock the Financial Readiness score. Bring. It. On.

The online survey asked me about my type of work, personal annual income, plus household income. Not bad, I thought, not bad.

Next, I answered questions on whether I rented or owned a home, the size of my monthly housing payment, and whether or not I budgeted. Home ownership, yes, budgeting, not so much. I hate budgeting.

Further questions prompted me to discuss my insurance against disability or loss of life, my dependents, and my retirement savings and investments. Well, I like to think I don’t over-insure, but I do have some retirement accounts.

Finally, the survey asked about whether I have documented my will, and whether I have named a health-care proxy. Yes. Totally. Nailed it.

My score

At the end of the survey my pulse quickened in anticipation of a huge pat-on-the-back for my incredible financial readiness.

I got a 66. Out of 100.

What?! Me? There must be some mistake.

A 66?

I’ve never gotten a 66 on anything in my life. Even worse, a 66 on my finances?!

I have three thoughts about my Financial Readiness Score.

financial_readiness_score
A 66?!

My first thought I already told you, which is: “What?!”

That thought represents “Denial” and “Anger” steps in my five stages of grief.

Second Thought

My second thought – (possibly part of “Bargaining and “Depression”?) – came from a closer review of the Financial Readiness plan which my bank provided, following my score.

My Financial Readiness Report showed areas where I could improve my score, by reviewing and changing my approach to savings, planning, and financial protection.

The report suggested setting budgetary goals. That’s probably not happening. It also prompted me to consider upping my insurance coverage. Not surprisingly, my bank is also involved in savings accounts and insurance, so you can see a bit where they’re coming from.

I’m not saying their wrong. I’m just saying they have an agenda.

I have strong feelings about some of these things, and I think on at least a few topics, reasonable people could disagree.

Building an “Emergency Fund” – which my report strongly encourages – happens to be something which I philosophically disagree with, as I’ve written about in the past. LINK [http://www.bankers-anonymous.com/blog/some-terrible-financial-advice-the-emergency-fund/]

Boosting my auto-insurance total coverage, or my wife’s life insurance coverage – also recommended by my Financial Readiness report – also is something I’m not likely to do, as I’m philosophically an insurance minimalist [LINK: http://www.bankers-anonymous.com/blog/guest-post-dont-buy-too-much-insurance/]

In exploring these areas for boosting my score, I noticed robust prompts to action. In modelling out my retirement planning, for example, I got a chance to see how my intended retirement age, as well as my appetite for risk, would affect the probability of meeting my retirement goals. It was pretty cool, actually.

Third Thought

financial_readinessMy third thought about my Financial Readiness score, as I move toward “Acceptance,” is that these simple but potentially catalytic surveys – paired with calls to action – might be quite useful. Let me expand on that thought for a moment.

Most of us need financial guidance. A fundamental theme of my financial writing is that almost nobody feels confident that they have all their finances figured out, yet few know where to turn to a trustworthy source.

We don’t like banks. We don’t trust our financial advisor. Insurance confuses us. The last thing we want to do as adults is spend precious free time with a lawyer to talk about what happens to all our stuff when we die. In all that confusion and natural aversion, we tend to not even know where to begin. So, like everybody else, we punt decision-making until some medium-distant future, maybe months from now, maybe when a crisis happens, or maybe until never.

Possibly, a five-minute internet-style quiz from my bank becomes the on-ramp to better planning and decisions?

I mean, not in my case, since the quiz is obviously flawed and they got my score wrong. But, you know, maybe for others.

 

A version of this appeared in the San Antonio Express News

 

See related posts

Why I hate my bank

Emergency Fund – That Silly Sacred Cow

Insurance

 

 

 

Post read (426) times.

Tax Liens In My Life

tax_liensSince I like to write about finance, all of real life is merely raw material for finance lessons, so I beg your pardon while I talk about tax liens in my life.

A while back  I described my astonishment at how low property taxes were for ‘agricultural exemption’ property that I happened to be eyeing for investment purposes. Long story short, I ended up buying a one-fifth interest in raw land in a rural part of the County where I live (Bexar County, TX) agricultural exemption included.

My property investment

I mention my property investment to illustrate the role of tax liens. Bear with me for a bit as I explain a sort of complicated situation.

I only bought one fifth of the property, while the other four-fifths remain owned by four siblings (not mine) who inherited the property. While the family dynamic is opaque to me (they were strangers to me before my investment), I understand that some siblings have sufficient money and some don’t, and some siblings care to pay attention to details like property taxes, and some don’t. Meanwhile, taxes on the parcel of land have gone unpaid for a few years.

This makes me extremely nervous for my investment.

Fail to pay property taxes, and you eventually run the risk of losing your property to the foreclosure power of the taxing authority, typically a city or town. Needless to say, I don’t want to lose this property, and if we leave taxes unpaid for too long, eventually Bexar County will take the land.

Tax lien lenders

Now, you may or may not have ever heard of ‘tax lien’ lenders and investors, so if not, let me be the first to illuminate for you a fascinating little section of the real estate finance world.

Ever since I registered my name on the property deed as partial owner last Spring, I have been inundated with solicitations from tax lien lenders. My name – along with the siblings – shows up publically as owners of a parcel with delinquent taxes owed. Hence, the solicitations.

The tax lien lenders offer to pay our property taxes now owed on the property. Meanwhile, if we did the deal, the lenders would use the real estate as collateral for the loan in the event I (and the sibling heirs) fail to pay back the loan in the future. Tax lien buyers (or in Texas, tax lien lenders) have the power to act like the municipality, and eventually take over the property for themselves in the event of non-payment.

In my complicated situation, with some of us owners unable to pay the taxes or possibly unwilling to put up money for the others for an indefinite amount of time, these lenders make some sense.

Partly I mention this whole anecdote because tax lien investing/lending is an obscure but important part of real estate and municipal finance.

Partly I mention this because tax lien investing may inspire a natural aversion. On the face of it, any lender who has the power to take away your property seems, I don’t know, scary? I mean, regular bankers seem unlikable enough. From a PR standpoint, however, the specific combined function of ‘tax collector’ and ‘money lender’ has an even tougher time getting a fair hearing. Those labels have served for thousands of years as biblical shorthand for enemies of the common people.

Personally, I have no problem with the solicitations to pay my taxes in exchange for an eight to twelve percent loan. We might need that solution.

The ironic thing here is that – in my old investing life – I was on the other side of this situation.

My tax-lien buying

I discovered tax lien investing in 2005 after buying a book called The 16 Percent Solution, in which the author explained a high-return and low-risk path to wealth through tax lien investing. Through my investment company I first started purchasing liens in New Jersey and New York, eventually branching out into Connecticut, Vermont, Rhode Island and even Mississippi.

Incidentally, I was a very unwelcome (meaning: Yankee) participant in my one Mississippi tax lien auction. I’m just happy to have gotten out of there in one piece. Bless your hearts, people of Wilkinson, Mississippi!

Tax lien investing and lending happens around the country, with state and local variations adding to the complexity. On the positive side, the interest rates earned seem very attractive, while the risk seems low. On the negative side – as I learned over the course of a few years of tax lien investing – it’s quite easy to lose money through tax lien investing as well.

As I purchased liens, I sometimes wondered about the complex situations that led people to become delinquent on their real estate taxes. Now I’m in one of these complex situations, and I sort of get it.

My situation

I don’t know when we will all be able to agree on paying the taxes. It may be a better idea to borrow the tax money – even if we have to pay eight to twelve percent on the loan – than to risk losing the property outright to the county via foreclosure. A loan may give us enough time to figure out an eventual solution – either by paying the taxes or selling the property.

 

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

See related post:

 

Real Estate Tax Rant – Agricultural exemptions

 

 

Post read (391) times.

Now How Much Would You Pay? Comparing Fund Costs

A wise man wrote about investing: “performance may come and go, but costs are forever.”[1]

Let’s explore a bit how big these cost difference really become for your investment portfolio.

As a starting point, do you already have a sense for whether the cost differences between funds you may own are in the hundreds of dollars? Or maybe the thousands? Could they possibly be in the tens of thousands? Surely not more than that?[2]

(Here’s a sneak preview hint of the answer: Wall Street is very profitable.)

dont_call_me_shirley

Differences over time

To illustrate cost differences, let’s pretend you are a 40 year-old with a $100,000 mutual fund investment that will earn 7 percent annual return in the market, over the next 30 years. I know, lots of assumptions that may or may not be true for you, but we have to start somewhere.

The first key thing to know is that the average actively managed mutual fund charges 0.8 percent as an annual management fee, while the average passively managed – or ‘indexed’ – mutual fund charges 0.14 percent per year, for a difference of 0.66 percent in fees, (this according to mutual fund giant Vanguard.)

Hundreds!

For a $100,000 investment, the cost difference in fees averages $660 per year.[3] So, I guess active management costs us hundreds of dollars per year, then.

Tens of thousands?

how_much_would_you_pay

But wait. Annual management fee costs rise as your funds grows, so the annual fee differences grow as well. Using averages, you should expect to pay your mutual fund company $65,518 total in fees for an actively managed fund that returns 7 percent over a 30-year period, compared to $12,896 for a passively managed fund also growing at 7 percent.

Um, so you’re telling me the average cost difference between an active and a passive fund is $52,622 over 30 years? In the tens of thousands of dollars?

Yes, yes I am telling you that.

Hundreds of thousands!?

But just wait. Even that comparison underplays the differences in costs. Since you are attempting through your investments to grow your money on your money, the lost growth on the money you pay in fees each year actually drags down performance even more than it at first appears.

The difference in final performance, considering the compounding effects of fees paid out of your investments, leads to a $124,141 wealth difference at the end of 30 years.

Wait, what!? Yes, you noticed that. The all-in cost of your mutual fund may end up larger than your original investment.
Pick any assumptions

You could test a wide variety of assumptions and the differences will be dramatic, even if the final numbers vary.

Crank up the annual return assumptions, and the differences become even bigger. Crank up the number of years invested, and the differences become even bigger. Crank up the amount of money invested, and the differences become even bigger. Crank up the management fee of the actively managed fund to a very typical rate, rather than the average 0.8 percent, and the differences become even bigger.

Millions?!?

How about a $1 million stock portfolio, returning 10% over 40 years, paying 1 percent for active management instead of 0.14 percent for indexing? (By the way, these are not crazy assumptions for many people) The wealth difference at the end of forty years, making the simple choice about active versus passive investing, is $11,602,001.

In a related question, have you ever wondered how Wall Street got so big?

Active versus Passive

Now, clever readers will notice something I’ve not yet addressed in my comparison of low-cost versus high-cost mutual funds.

hedge_fund_myth

What if I adopt the assumption of the mutual fund industry itself – which is built on the idea that a good reason to pay more in fees is to get better performance? Meaning, if an actively managed fund can earn 8 percent per year instead of the 7 percent per year from an index fund, then my cost comparisons become irrelevant in the face of superior performance. Right?

Ok, that’s possible.

All you have to do, therefore, is be confident about two things:

  1. Active managers typically outperform passive managers.
  2. You, specifically, (or your investment advisor) have the skill to know, ahead of time, which active managers will outperform passive (aka index) funds over the next thirty years.

Unfortunately for the mutual fund industry’s underpinning assumption – these turn out to be absurd ideas most of the time, for most funds, and for most people.

coin_toss
Picking managers: a bit like this

I’ll start with assumption number one, about the consistency of outperformance of active managers over time. The quick answer is that about 3 percent of mutual funds that achieve top performance over any five year period also go on to achieve top performance in the following five year period. Sadly, the vast majority of actively managed funds underperform their benchmark over the long run. And the longer the run, the fewer the outperformers.

On assumption number two, whether you or your advisor can select the rare winner among active managers, I don’t know. I mean, who am I to say?

Ok fine, I’ll say it: You can’t, and you won’t.

 

[1] Reminds me of the politically incorrect joke from the 1980s about the difference between love and herpes.

[2] Please don’t call me Shirley.

[3] That’s $100,000 times 0.66 percent, but you already knew that.

 

Please see related posts:

How to Invest

The Simplest Investment Approach, ever, by Lars Kroijer

Lars Kroijer on having an ‘edge’

 

 

Post read (311) times.