investing Archives - Bankers Anonymous

June 14, 2023June 14, 2023

Book Review: The Psychology of Money by Morgan Housel

In 2020, the best living writer on personal finance published his first book. (No, I don’t mean me, silly. You are just too kind, stop it, I’m blushing.)

Morgan Housel wrote The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness and, of course, I had pre-ordered it from Amazon and yeah, you should read it.

If you’ve already read dozens of personal finance books (I have!) then I’m not saying you must read this one. But you will be entertained, and you will finish it in less than a day. If you haven’t read many personal finance books before, then this is a really good place to start. And if you haven’t specifically read Morgan Housel before then you are in for a treat.

Each chapter tackles a key aspect of wealth-building. I particularly enjoyed his chapters on wealth, risk-aversion, and narrative bias.

Wealth is not achieved by owning a bunch of expensive stuff. The fast cars, the big houses, the fancy electronics. We often believe people who have those things must be wealthy. Maybe they are, or maybe they just have an appetite for debt. Without checking their bank statements, we usually don’t know. Wealth, Housel argues – I heartily agree – is better measured in terms of freedom. Freedom to spend your day just as you choose, wherever you want, with whomever you want.

Importantly, a pile of money in the bank can be quite helpful in obtaining that freedom. But equally true, vastly different amounts of money enables emancipation from obligation, depending on the size of one’s wants.

To the extent the expensive stuff actually diminishes your available pile of money necessary for freedom from obligation, it’s not a stretch to understand that the car, house, and electronics may actually result in less wealth, not more. Wealth, Housel reminds us, is achieved through what you don’t buy. Readers familiar with the classic finance book The Millionaire Next Door will recognize this whole thought process.

Here’s another great point Housel makes. In investing, the price for good returns is often volatility and uncertainty. If you can’t handle either volatility or uncertainty, you can’t afford to be in assets that provide a good return. Most people, it turns out, can’t really pay that price. In behavioral finance, we talk about the related idea of asymmetric risk aversion. This means we suffer from losses much more acutely than we enjoy gains. We focus on the bad and have trouble tracking the good. A pessimistic worldview holds our attention and feels “realistic” while an optimistic worldview feels “unserious” or “unreliable.” Newspapers know this, as captured by the cliche “If it bleeds, it leads.”

Nobel-prize winner Daniel Kahneman suggests this focus on the negative over the positive had evolutionary roots, “This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”

Unfortunately, this explains why most people can’t handle the advice to “buy and hold” stocks for multiple decades, despite overwhelming evidence that this is the right way to go.

Like other accessible finance writers, Housel relies on narrative and anecdotes to illustrate his timeless lessons. You will recognize familiar heroes and villains from these stories of wealth and greed, such as Warren Buffett and Bill Gates, Bernie Madoff and Rajat Gupta.

As an improvement on the familiar, Housel devotes a chapter to how narrative can deceive as well as illuminate, when it comes to investing. Behavioral finance teaches us that in the face of uncertainty – and investing is always uncertain – our brains tend to tell us stories that make us feel less uncertain, even when that’s unwarranted. Once we become attached to a certain story – this company always beats its earnings, that industry is crumbling, this entrepreneur achieves engineering wizardry on a regular basis – we disregard the data that doesn’t reinforce our pre-set narrative. We do this in our relationships, in our personal identity, and in our politics. Housel warns that it can be an expensive tendency to stick to the same preconceived narrative in investing.

One of the most pleasing parts of finishing The Psychology of Money, to me, is that Housel eventually says in the penultimate chapter what he does with his own money and investment portfolio.

If you always wondered what a careful money knower does with his own money, you may be similarly interested in that question and his answer.

Readers of my stuff over the years will already know how I answer that question. But if you don’t yet know, I am pleased to report that Housel does exactly what I think the right answer is. So you can read his, and my, answer for yourself, in Chapter 20.

But of course we should consider the implicit possibility, which I now make explicit, that maybe I appreciate and celebrate Housel because his narrative about money and investing closely matches my own narrative about money and investing? Perhaps I have fallen prey to the very same confirmation bias that behavioral finance warns us against? Gosh, it’s all so meta.

Addendum

Quick addendum about the best living finance writers. In 2020, The New York Times wrote up a feature on the second-best living finance writer, Matt Levine

Levine writes a column for Bloomberg News called “Money Stuff,” available for free as a daily email. Everyone should subscribe.

He is intellectual, hilarious, and produces in-depth, annotated daily explainers about Wall Street from a guy who used to work on Wall Street, respects the game, revels in the complexity, but who also sees the irony and humor in it all. Levine is like me, but five times as good.

Thankfully the competition is still open for third-best living writer on finance. I’m reserving a spot on my mantle for the bronze medal. So, please, get all your ballots in on time. Is that not what this election chatter I’ve been hearing is all about?

Please see related posts:

How to Invest

Please see all Bankers Anonymous book reviews

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December 1, 2021December 1, 2021

Book Review: The Four Pillars of Investing by William Bernstein

Note: I’m months late in posting this review, which was actually Summer Reading this year. A version of this post previously ran in the San Antonio Express News.

My summer reading book was The Four Pillars of Investing: Lessons For Building a Winning Portfolio by William Bernstein, which traditionally makes the top ten lists of best personal investing books, but which I had never read until this year.

Bernstein, a trained neurologist-turned-investment-writer-and-advisor, originally published The Four Pillars in 2002 and then updated it in 2010.

Although I had never read Bernstein’s Four Pillars before this week, I can honestly say that I have, over the years, 100 percent absorbed his philosophical approach to personal investing. There is almost no daylight between what he thinks we should do and what I think we should do. I guess that means I have read many of the other books or papers that underpin his approach. Or that I’ve been reading people influenced by Bernstein. Or maybe just that there is a single objectively best way to go about personal investing and we have independently arrived at the same place. (Honestly I’m sure it’s the first two options, not the third). So, if you were a blank slate and wondering what philosophical approach you should bring to investing – and you really trusted my judgment – then I would posit that you could read Bernstein and therefore know just what I would endorse.

The four pillars of Bernstein’s title are the theory, history, psychology, and business of investing. Bernstein offers a lightning round – a mere 200 pages – describing what you need to know about these four topics. In his fifth and final section he brings together a practical “how to” based on the earlier chapters. Spoiler alert: The “how to” is diversified index funds.

The prose is relatively easy – except maybe parts of the early chapters on investing theory – in which a bit of math could bog down casual readers.

On investing theory, Bernstein says you must expose yourself to risk in order to receive a positive return, markets are more efficient than you think, and that fundamental investing derives from valuing future cashflows with a mathematical calculation that tells you what those cash flows are worth today. All very solid stuff.

Knowing investment history is the key next step. I learned plenty about the development of mutual funds and the origin-stories of firms like Merrill Lynch, Fidelity, and Vanguard, plus deeper histories – always useful – about up-market manias and down-market busts. His history of Vanguard and its role in pioneering low-cost mutual funds is worth the price of admission.

I believe that understanding investing psychology – the problems coming from inside our own brain – is the key to succeeding as an individual investor. Berstein explains the pitfalls of misunderstanding risk, the classic errors of confusing luck and skill, being overinfluenced by the recent past, and finding patterns where there are none.

Finally, understanding the business of investing – the real way in which investment firms earn a living from us – is essential.

There are investment companies and there are marketing companies disguised as investment companies. Bernstein posits that ninety percent are really marketing companies while only 10 percent are investment companies. The majority of investment professionals are focused on sales, not investing. One way you can spot the marketing companies is because they sell high-fee mutual funds, load funds, variable annuities, and other insurance products.

Is The Four Pillars perfect? No.

Many of his stories read like they came from the early 2000s, in the sense of salient anecdotes from the financial world and references to events in the 80s and 90s that only older folks will remember vividly.

One area I disagree with Bernstein is on workplace retirement accounts like 401(k) plans, which he warns are disasters. In contrast I think they are quite beautiful and important.

He writes,

“The ascent of self-directed, defined-contribution plans – of which the 401(k) is the most common type – is a national catastrophe waiting to happen. The average employee, who is not familiar with the market basics outlined in this book, is no more able to competently direct his own investments than he is to remove his child’s appendix or build his own car.”

I worry that people reading his view that they are a disaster would then not take advantage of their tax-deferred workplace investment programs.

But I take his point that few people are prepared to maximize their opportunity or to efficiently manage their own investing. Reading one or two classic personal investing books – like his – would go a long way toward correcting this problem.¹

Bernstein’s section on investment fees seems outdated to me, in that he’s referencing 2 percent investment advisor fees and the prevalence of front-loaded mutual funds. Don’t get me wrong, these still exist and Bernstein’s main point still stands, which is that traditionally the money management industry charges ridiculously high fees and delivers mediocre results. The trends have improved over the past 20 years and fees, thankfully, have been coming down in some – but not all! – areas of investing.

You could accurately call The Four Pillars a slightly dated book. In an important sense, however, a bit of mustiness enhances the credibility of a personal finance book, to me. It means the book has stood the test of time. It means something timeless and true is being taught, rather than timely but ephemeral.

My own personal Mount Rushmore of investing books were first published in 1999, 1978, 1973, and 1949. They are Simple Wealth, Inevitable Wealth by Nick Murray; The Only Investment Guide You’ll Ever Need by Andrew Tobias; A Random Walk Down Wall Street by Burton Malkiel; and The Intelligent Investor by Benjamin Graham, respectively.

You will gain more from reading one of those books than you possibly could learn in hundreds of hours watching videos, browsing online, or even – gasp! – reading this blog. Bernstein in The Four Pillars makes the correct observation that investment journalism has an inherent problem in that the correct thing to advocate – always and only invest in terribly boring index funds – is the dullest possible story. How can we write headlines with that message day after day? So instead we write endlessly about the improbable and the sensational – the cryptocurrencies and the billionaires. It’s much more interesting to write headlines about Dogecoin and GameStop, despite the fact that these are, or should be, deeply irrelevant to our lives.

I enjoy learning about other finance books I have yet to read, so please feel free to send me your top recommendation – something that improved your relationship with money and investing. Thanks!

ps. My secret ambition is that someday every else’s personal Mount Rushmore of Personal Finance books will include my book, The Financial Rules For New College Graduates.

Please see related posts:

All Bankers Anonymous Book Reviews in One Place!

Book Review: The Delusions of Crowds, by William Bernstein (pending)

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I have one other mild critique: I don’t love the way Bernstein explains the math of discounting cashflows. That happens to be an obsession of mine, so I may be overly critical, but nevertheless I didn’t think his math explanations were as clear as they could have been. ↩

August 24, 2021August 24, 2021

Breaking My Own Rules To Teach My Kid

NOTE: I wrote this back in March 2021, the week that Roblox did its direct listing. A version of the post ran in the San Antonio Express-News.

To research the hottest new tech stock, Roblox, I went straight to my highly plugged-in in-house analyst: my eleven year-old daughter. She sat me down on the couch with her iPad and patiently explained to me the user-generated games, the in-app purchases, and the revenues available to both gamers and creators on this gaming platform. After that, we arranged for a $50 investment of her money¹ in shares on the first day they became available, Wednesday March 10th.

Roblox listed 199 millions shares on the New York Stock Exchange last week² but did it in a most unusual way: a direct listing, rather than an IPO.

There are at least two innovative things to know about this. One is about the company and the other is about this direct issuance, which I suspect we’ll see a lot more of in the future.

Most companies that list shares on stock exchanges first do an initial public offering (an IPO). An IPO involves investment bankers preparing a “road show” and a consulted negotiation around the issuance price that all new investors will pay. A company doing an IPO typically seeks to both raise new money for the business and to allow private investors to sell some of their stakes in the business.

A direct listing, by contrast, raises no new money for the company. It merely allows privately-held stakes to be floated on an exchange – The New York Stock Exchange in the case of Roblox – to allow insiders a chance to cash out and outsiders a chance to buy in.

Roblox didn’t need new money, in part because it secured $850 million in private financing in January of this year, solving the fundraising part of an IPO ahead of time. Roblox had already ended 2020 with close to a billion dollars on hand, further explaining why it skipped the fundraising part of an IPO. It also saw fourth quarter revenues jump 111 percent from 2019 to 2020, providing the kind of growth tech investors crave. Roblox had cash, name recognition, and buzzy growth, so the road show and fundraising parts of going public were unnecessary.

Until now, direct listings have been extremely rare. Spotify – the audio-streaming company founded in Sweden – is the highest-profile direct listing ever done previously, back in 2018. By direct listing rather than hiring a traditional Wall Street underwriter, a company can in theory save huge bucks, which typically runs between 3 and 7 percent of the money raised. A direct listing not only forgoes the support of a new issuance, it skips the marketing hype that accompanies a traditional roadshow. In the case of Spotify as well as Roblox, they didn’t need the marketing hype. Among their customers and within their own industry, they are dominant providers. And by all appearances, the shares didn’t do worse as a result of a direct listing rather than a traditional underwriting process. Roblox soared 54 percent from its initial listing price on the first day.

This direct listing method is all pretty new stuff.

The New York Stock Exchange moved in the direction of allowing more direct listings through a request to the SEC in 2019. In December 2020, the Securities and Exchange Commission approved direct listings (under certain conditions). The Roblox listing last week is the first high profile test of this way companies can reduce their Wall Street fees and, given its success, we should expect more companies going public to choose this route in the future.

Meanwhile, Roblox itself is innovating in other ways. For better and worse, they have mastered the art of capturing kids’ attention with their immersive-world game platform.

For the past year and a half – during COVID isolation from school and ordinary interactions with other humans – Roblox has occupied more of my daughter’s time than any other single activity, except maybe sleeping. Even the sleeping part is arguable when lined up next to Roblox time.

You may be curious, what does she do on Roblox? It’s virtual-reality games. Her favorite game, “Adopt Me,” is about adopting a pet. And then upgrading that pet into the most stylish and unique pet possible. Her latest acquisition last week, a golden unicorn via a hard-earned golden egg, was incredibly exciting, apparently. You had to be there. Other games within the virtual reality involve heists, escaping burning buildings, or avoiding a killer. Normal stuff kids are into, I guess.

The Roblox company, as a games platform, facilitates user-generated content, meaning gamers can invent their own games. For that, designers receive either virtual dollars or real dollars. In real dollar terms, over a thousand game designers have earned more than ten thousand dollars in the past year on the Roblox platform. That may not support a family, but to an eleven year old that amount of money seems incredibly enticing.

Through the course of this column, I have described breaking at least three of Mike’s Cardinal Rules of Investing, so I briefly just want to acknowledge these and then explain my rule transgressions.

First, I don’t recommend you buy individual stocks. For kids, however, I do think purchasing individual stocks is useful for teaching and learning purposes. Individual stocks for companies they know can get them excited about the magic of investing, capitalism, markets, and compound interest. It’s just too darn boring and abstract to explain low-cost diversified index funds to an eleven year-old, even though that is how all of us should always invest.

Second, I never write about individual stocks I own (or that my family owns) because I don’t generally own any and also I don’t want even the appearance of a conflict of interest between my writing and my family finances. So I broke that rule also today. To which, in my defense, I can only plead with you to believe that I have not sold my journalistic soul to shill and pump up my eleven year-old’s $50 stock investment. To be clear, in no way do I recommend Roblox shares for any of you. This thing is probably going to zero. Which would be a great educational outcome for her! She might cry, but I would be happy, because $50 is a very cheap lifelong lesson from Daddy on the risks of owning individual stocks!

Finally, I always recommend against buying new listings – traditionally IPOs – for a variety of prudent reasons having to do with information disadvantages, media hype, and the greedy exuberance of insiders selling to a credulous group of outsiders. Please excuse my rule transgressions today, they were each done with an educational purpose.

Please see related post:

My review of M1 Finance

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If you’re wondering how to invest just $50 in shares that each cost $65 on the first day of trading, the technical answer is the investing app known as M1 Finance, which allows for fractional ownership of shares and about which I wrote a thing here in December 2018. ↩
Again, not exactly last week, but in March 2021. ↩

July 8, 2019July 8, 2019

Annuities Rant Part III – Moderating my Complaints

I spilled considerable ink this Spring bashing all manner of insurance products peddled as investment products. I base my un-sell of insurance products on their complexity, illiquidity, mediocre returns, and high costs. Now I will pull some of my punches and give a more moderated view of some annuity products.

The summary of my more moderate views: Some people are happy with their variable annuities and have had good returns, without paying excessive fees. If you already own an annuity product, I don’t think you should necessarily sell it right now, or right away. Finally, fixed rate annuities are at least simple. I like simple.

Don’t get me wrong. I don’t actually endorse these things.

Annuities generally put me in a dark place.

Other than their complexity, illiquidity, mediocre returns, and high costs, I like annuities just fine.

It’s like that awful joke: “Other than that, Mrs. Lincoln, how did you like the play?”

I’ve received numerous responses from insurance salespeople this Spring about how weak my arguments are regarding annuity products. I read their responses and think of Upton Sinclair’s wisdom: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Occasionally, when feeling cheeky, I respond to those emails, with Sinclair’s words.

But a thoughtful column-reader recently responded to my variable annuity-bashing by sharing his carefully kept spreadsheet of his variable annuity with Vanguard, which he bought in 2004. Quite frankly, he’s has been happy with it ever since.

His annuity owns a mixture of seven different equity-based Vanguard mutual funds. Whereas most variable annuity funds I’ve seen charge 1.5 to 2.5% management fees, his funds average 0.55% management fee, which I find utterly reasonable. In addition, the “mortality and expense risk charge” accompanying variable annuity funds – which typically runs from 0.4% to 1.75% across the industry – is a mere 0.17% at Vanguard. Again, quite reasonable.

Not coincidentally, he’s happy to report, his returns since 2004 have been quite competitive.

With a starting value of $110 thousand in early 2004, his funds grew to $340 thousand by mid-May 2019. That’s a 7.7% annual return over a little more than 15 years.

That compares pretty well with an 8.7% return including reinvestment of dividends of the Wilshire 5000 Index of the broad US stock market, or an 8.3% return for the S&P500 index of large US companies. Given mutual fund management costs, I’d say his 7.7% annual compound return on his variable annuity is as good as one could reasonably expect.

His stated reason for purchasing a variable annuity product, rather than a straight brokerage product, is to simplify passing on wealth to his heirs. His belief is that the variable annuity will pass smoothly to his intended beneficiaries without the risk of going through a probate court. I am no estate-planning expert, but if this gives him peace of mind, then that’s great.

One of the distinguishing characteristics about this variable annuity investor is that he was not sold the product by a commissioned salesperson. That partly explains his low costs.

My second moderating comment about various annuity products is that I would not presume to tell anyone to sell theirs, if they already own one. That’s a question that I get asked whenever I talk about how terrible they are.

So I’ll say it clearly: If you have an annuity already, don’t sell it right away. Often in personal finance matters, inaction is the best course. This is because action is costly, and other alternatives could be worse. Maybe what’s done is done. Maybe your annuity works for you. Maybe you have plenty of money already. I’m mostly talking about what you should not buy in the future.

Without knowing anything about your specific situation, a plausible solution to your problem of “I’m currently paying into a terrible annuity product, what do I do?” is to cease paying in to that product, starting paying for a better product, and then over time evaluate whether and how the existing annuity you bought can play a reasonable role in your long term financial plan.

And then finally, what about a fixed rate annuity?

I recently received a quote from my preferred insurance provider for a fixed rate annuity. I wanted to know, assuming I turned over $100,000, what kind of monthly lifetime income could I lock in? The answer is $391.64 per month, for life. I’m 47 years old. Were I older, the monthly payment would be higher, since I’d be more likely to die quicker.

The expected return on my fixed rate annuity was 3%. I don’t find that sufficient. I would never advise anyone with a net worth less than, say, $5 million, to buy one of these.

On the other hand, it’s very straightforward. We can all have different preferences for risk. Some annuities, especially fixed rate annuities, provide certainty. Fixed rate annuities like this are terrible for growing wealth, but have the advantage of simplicity. I like simple. And no fees. You turn over your $100 thousand. You lock in $391.64 for life. They are easily explained and understood. They never let you down.

Except under conditions of medium to high inflation. Other than that though, they’re safe.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts:

Annuities – Death Eaters

Annuities Rant Part I – Complexity

Annuities Rant Part II – High Fees, Low Returns

Variable Annuities – Shit Sandwich

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November 9, 2018November 9, 2018

Federal Reserve and Inflation

The Federal Reserve has raised short term interest rates three times already this year by one-quarter percent, and it seems poised to do so again in December, even though it left rates unchanged this week. Over the next two years, barring an unanticipated war or recession, the Federal Reserve will raise short-term rates by another percentage point.

We may have different reasons for benefiting from higher or lower interest rates, depending on whether we are primarily borrowers or savers, employers or employees, exporters or importers, young or old.

The effects of rate hikes on the economy are complex and incredibly important. But we probably think of interest rates and the Federal Reserve a bit like changes to the earth’s climate – massive forces shifting ominously, seemingly far beyond our individual control. We vaguely understand them to have huge implications. We’d like to know more, but how?

There are two big questions to understand today about the Federal Reserve and rising interest rates.

First, what is the relationship between inflation and interest rate hikes?

Second, what is the proper relationship between political leaders and the Federal Reserve?

I’ll talk about the inflation question here and leave the political question of the Federal Reserve for a later post.

From a multi-decade perspective, we’re moving from artificially low interest-rates – dating back to a period that started with the 9/11 attacks and were renewed by the 2008 financial crisis – to a more “normal range” interest rate environment.

In normal times, the Federal Reserve raises rates when it worries about inflation, and it lowers rates when it worries most about unemployment. The Fed’s not worried about unemployment – currently at a 49-year low. Instead, the Fed seeks to keep inflation in check. But because inflation apparently isn’t rampant, the Fed can take it’s time with gradual rate hikes.

One of the great economic mysteries of the last decade is the absence, or at least inconsistency, of observable inflation, despite the fact that the Federal Reserve pulled out all the stops to make lots of money available in the years following the 2008 financial crisis. Pretty much every observer, even supporters of the post-2008 crisis policy of easy-money-plus-low-interest-rates, predicted a significant uptick in inflation. That, seemingly, was the price we had to pay to kickstart the economy.

But then, it didn’t happen. Or it didn’t happen in the way we expected. From the beginning of 2010 through September 2018, the Consumer Price Index – a traditional measure of inflation – rose only 16.4 percent. Annual inflation averaged less than 1.7 percent in that period, which is totally non-threatening. Consumer inflation from 2010 to today is like the dog that didn’t bark in the night.

We can be a bit more sophisticated though in understanding different types inflation and what it means for different people in an economy.

Inflation types

We should be aware of least three different types of inflation.

There’s the traditional type of consumer price inflation we see, which shows up in the price of gasoline, the stuff we buy at WalMart, health care, tuition, and the cost of a pizza on a Friday night. I know you think you’re paying too much lately for this stuff, but compared to other decades consumer inflation has been pretty modest.

At least two other types of inflation matter as well, however, asset price inflation and wage inflation.

Asset price inflation shows up as the increase in the price of real estate and the stock market. We generally cheer this type of inflation as a healthy sign of economic growth, although it’s not a purely good thing, depending on who you are.

To pick one real estate measure for example, the St. Louis Federal Reserve House Price Index for Texas has risen by 49.8 percent since the beginning of 2010. In other words, even though consumer goods cost just 16 percent more, houses in Texas cost 50 percent more than they did in 2010. What about stocks? To pick another measure, the Russell 2000 Index of small capitalization stocks is up 150% since the beginning of 2010. The rise in stocks isn’t entirely inflation, as its partly due to retained profits and buybacks, but inflation is part of that 150% rise in stocks.

So, is asset inflation good or bad? It depends.

Where you stand depends on where you sit

If you’re a twenty-something or thirty-something trying to save for your first home purchase, and home prices rise by 5-10 percent each year over a decade, this type of inflation actually hurts your plans. Similarly, for a young person trying to accumulate a retirement account nest egg through stock investing, a rising stock market is actually quite a bad thing. A twenty or thirty-something saver and investor should fear asset price inflation because it makes their wealth-building plan much harder to enact.

Interest rates hikes have traditionally had a dampening effect on asset price inflation.

Finally, there’s wage inflation. If you’re a worker earning a salary, you of course want high inflation of your wages and benefits. Measuring the change in the Employment Cost Index for civilian workers since 2010 until the latest 2018 numbers, we can calculate an average of 19.2 percent inflation in total compensation.

An employer, obviously, will experience wage inflation as a big problem, one that directly cuts into the cost of doing business and profits. A worker, by contrast, directly benefits from wage inflation.

I mention all these different types of inflation because interest rate hikes tend to dampen all three types – consumer, asset price, and wage inflation. Depending on who you are, higher interest rates will affect you in different ways, even though we typically only think of consumer inflation. Are you a worker or an employer? Are you an importer or an exporter? Are you young or old? Are you a borrower or a saver?

With observable consumer inflation so low, does it even make sense for the Federal Reserve to raise interest rates? President Donald Trump doesn’t think so. He has argued in recent weeks that the Fed is “loco,” and that “my biggest threat is the Fed,” and because “you don’t see that inflation coming back” that he disagrees with the Federal Reserve’s moves to hike interest rates.

Let’s talk about that in a later post.

Please see related post:

Federal Reserve and an Independent Central Bank

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January 2, 2017January 2, 2017

Look Back Look Forward – New Years Resolutions

It’s January, the month named for Janus the two-faced Roman God who looked both backward to the past and forward to the future.

Looking back over 2016, I realized that I learned about three types of investment accounts, each of which – depending on your phase of life – might make for a nice New Year’s Financial Resolution.

Maybe best of all, all three investment accounts work well even if you start with small dollar amounts. And they each scale up to larger amounts, if you have the means.

Contemplating the start of a new year prompted me to divide these investment account ideas into three categories, past, present, and future. Or you could categorize them as investment accounts for the young, the middle-aged, and the old. I’ll start with the young.

Millennials – Automatic Deductions – Acorns

People in your twenties: This one’s for you. The number one key to investment success is starting early in life, yet we often don’t for a variety of perfectly good reasons. The Acorns app addresses many of these barriers, through automatic regular deductions into a super-simple, low-cost, diversified portfolio. The app takes about five minutes and just $5 to get started. It’s mobile-friendly and has an intuitive interface. Acorns gives you a picture of your investment value now, but interestingly also shows you graphs of how your investing activity – when you stick with it month after month and year after year – will grow your account over the coming decades. I’m a big fan of anything that shows the awesome power of compound interest.

acorns_2000 — My Jan 1, 2017 balance, after just 7 months

Automatic deductions from your checking account into an investment account is not just A WAY to invest. It’s really THE ONLY WAY to invest for most people of modest means. In my experience, nobody has a surplus at the end of the month unless we’ve devised a trick to whisk our money out of our account before own greedy little hands spend it. The Acorns App is the latest, best, trick to do that automatic whisking. I set up a $50/week automatic program in May 2016, just before I wrote my blog post on it. This week I have more than $2,000 in my account, and I barely noticed how it got there. This is painless investing, made super simple.

If you are 20-something and wondering how to begin investing, here’s the solution to your New Year’s Resolution. If you have a 20-something in your life, send them an Acorns invitation link.[1]

Parents – College Savings – 529 Accounts are for grandparents

Parents: This resolution is for you if you’re in my demographic. Two kids. Big college bills ahead (should they choose that path.) The more I’ve learned about 529 college savings accounts, the more I’d always recommend parents avoid them and build up tax-advantaged retirement accounts instead of 529s.

And yet, Sir Mix-A-Lot, let me add to that statement a big BUT:

529 accounts make a lot of sense for grandparents who have a surplus. Grandparents who have solved their retirement needs already can use 529s to help the younger generation. Grandparent 529s do not count against financial aid calculations. Also, unlike IRAs and 401(k)s, there’s no age or income limit on making contributions. Finally, 529s are even helpful for estate planning purposes. All of these factors make 529s a better deal for grandparents than parents.

So here’s my New Year’s resolution advice to parents: You might not prioritize 529s yourself (compared to a retirement account) but work to open up an account so that you can invite YOUR parents to contribute toward their grandchild’s college fund. Do it. It’s the right way to approach 529 accounts.

Older generation – Passing on Values – Donor-Advised Funds

I am not yet part of the older generation – at least in my own mind – but opening a Donor Advised Fund (DAF) in 2017 is actually my own personal New Year’s Resolution.

The idea of a DAF is that you can make a charitable contribution this year – reaping an income tax benefit now – while parceling out charitable gifts over a longer period of time, even decades. Investments in the DAF can grow in a tax-advantaged way, while you take your own sweet time to decide who should receive your philanthropic dollars in the coming years.

If you already have an investment advisor or brokerage firm, you could ask them about the availability and terms for opening up a DAF with them. If they don’t offer DAFs or you don’t like their terms, you should know that a few of the online supermarket brokerages have account minimums as little as $5,000, and charge a reasonable 0.6 percent annual fee. The point is you don’t need $25 million to open up your own private foundation. A DAF makes tax-advantaged philanthropic-giving available to the masses.

But what is the real reason for a DAF, in my mind? And why is this my own New Years’ Resolution, and maybe could be yours too?

Just this: The DAF allows you to appoint trustees, who then share in the decision-making for future charitable gifts. I have in mind appointing my 6 year-old and 11 year-old as fellow trustees of my $5,000 DAF endowment. Could we three generate maybe $250 in investment income every year – a 5 percent annual return – that we then plan together to give away each year? That renewable $250 in annual giving – driven by conversations with my kids – is the real point of the DAF. What I’m really getting for my $5,000 contribution is something of immense value: a conversation-starter.

I know I can’t move the dial of any particular charity with just $250 per year, or even a one-time $5,000, but I can create a vehicle to talk about values with my kids. We can engage in a forward-looking conversation about the uses, and meaning, of wealth.

If you’re in the older generation, with an even bigger surplus, maybe that’s a useful New Years’ resolution for you too.

I wish you peace and prosperity in 2017, and welcome your input into what financial topics you would like to read about in the coming year.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

See related posts:
College 529 Accounts are for Grandparents

This Acorns App rocks

DAFs help you create a pretty cool legacy

[1] And if you sign up using this particular link (rather than the generic one I inserted above in the main section), I get a $5 referral fee and you get a $5 starter fee, because those Acorns people are clever and give out $5 referrals to both inviter and invitee. But I’m seriously not whoring myself and my blog for the $5. This app is good.

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