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Cash-value life insurance isn’t an investment, it’s a religion—and you’ll never meet a more prickly group of disciples.

Weight Problem

MICHAEL BURRY waited years to be rewarded for his bet against subprime mortgages. Actor Christian Bale, in the movie version of Michael Lewis’s book, The Big Short, portrays Burry curled up in the fetal position on the floor of his office. When the financial crisis finally hit in 2008, he made $100 million.
I’m no Michael Burry and the chance I’ll ever see $100 million is about 100 million to one.

Read more »

Staying Positive

PRESIDENT TRUMP recently criticized the Federal Reserve—yet again. Calling Fed Chair Jerome Powell and his colleagues “boneheads,” the president expressed frustration that they haven’t done more to lower interest rates. Specifically, the president said we should, “get our interest rates down to ZERO, or less.” That last part—“or less”—was key. Not only should rates be lower, he argued, but they should be below zero, as they have been in Europe.
Last week, the Fed did indeed cut short-term interest rates—by 0.25 percentage point.

Read more »

Timely Reminder

PAST PERFORMANCE is no guarantee of future results. But we keep hoping.
Over the 10 years through August 2009, the large-cap stocks in the S&P 500 shed an average 0.8% a year, even with dividends included. Meanwhile, U.S. value stocks beat U.S growth stocks, smaller-cap U.S. shares notched 5.5% a year, developed foreign stock markets 2.7% and emerging markets 10.4%.
Fast forward one decade, and the leaders have become laggards and vice versa. Over the 10 years through August 2019,

Read more »

Shame on Us

OVER 600 YEARS ago, Geoffrey Chaucer gave the world The Canterbury Tales, a caustic look at a cross-section of English society. While all the stories are still worth reading, one tale is especially relevant to today’s consumer.
For those who don’t remember The Canterbury Tales, it’s a story about a group of pilgrims traveling from London to Canterbury. They pass the time on the road by having a contest to see who can tell the best tale.

Read more »

What Number?

A DECADE AGO, a large financial firm ran a clever advertising campaign that showed people going about their everyday lives carrying a bright orange six- or seven-figure sum that represented their number—how much money they needed to retire. It was clever because we humans like to simplify—and sometimes oversimplify—complicated issues. It’s one of our cognitive biases.
I spent almost 40 years in aerospace engineering. I did a lot of detailed engineering analyses, calculating expected performance numbers,

Read more »

Educated Consumers

COLLEGE STUDENTS who borrow graduate with an average $37,000 in loans. While many people believe loans are the only way to finance a college education, that’s simply not the case. Here are five ways to get an advanced education while minimizing debt:
1. Stay close to home. Sure, it’s fun to think about moving across the country to go to school. But staying close to home after high school comes with several benefits.

Read more »

Money Guide

Covered Calls

IN SEARCH OF EXTRA income, investors sometimes skip bonds—and instead sell call options against their stock portfolio. The buyers of these call options get the right to call away the underlying stock at a specified “strike” price either when the option expires or at any time up until the option’s expiration date. In return for that right, the buyers pay a premium to the sellers. Selling call options has two key drawbacks. First, trading options is a zero-sum game: For every winner, there’s a loser. In fact, it’s less than a zero-sum game once you factor in the trading costs involved. As a seller of call options, you’re the winner if the underlying stock goes nowhere, because you make a little extra dough by pocketing the call premium. But you could end up as the loser if the stock climbs above the strike price. You might miss out on big investment gains—and the call premium you received may not come close to compensating. That brings us to the second drawback. If you sell covered calls, you may see all of your good stocks called away and you might be left holding a bunch of duds. This could be more painful than you imagine. How so? Most years, the market’s performance is driven by a minority of stocks with strong performance, a phenomenon known as skewness. This shouldn’t be surprising: The most a stock can lose is 100% of its value, but the potential gain is unlimited. In many years, there will be a small number of stocks that score gains of 200%, 300% or more. If you write covered calls, your stocks that get called away could be among the market’s big winners. Want more income from your portfolio? You’ll likely achieve your goal at a lower investment cost, and with fewer hassles, by simply keeping a little less in stocks and a little more in bonds. Next: Asset No. 3: Cash Previous: Unit Investment Trusts Article: Got You Covered
Read more »

Archive

Taking Inventory

MY NEXT DOOR neighbor had her home burglarized. The thieves stole some expensive electronic equipment and jewelry. In the aftermath, I thought I should make a list of my valuable possessions and take a photo of each one, in case I ever have to file an insurance claim. Here’s my list of valuables: 1. Fender Telecaster guitar. Yes, that’s my complete list. I really don't own anything of value, other than that guitar, which my parents gave me in 1968 for my 17th birthday. I don't own any expensive jewelry or electronic equipment. My television is about 10 years old. I own an iPhone 5 worth $25 on a trade-in for a new phone. My other possessions are of no real value. I do own some watches and a ring that belonged to my father, which I keep in a safe deposit box. But their value is mostly sentimental. My list of valuable possessions also includes a small one-bedroom condominium and a 2010 Ford Fusion. Looking at that list, you might think I live a spartan life, but I feel it’s full and comfortable. I don’t hesitate to spend on things I value. Whenever I can get away, I like to travel. I enjoy dinning out with friends. I subscribe to a Major League Baseball cable package that allows me to watch my favorite team. I have satellite radio in my car, so I can listen to my favorite music. I subscribe to HBO, Showtime, Cinemax and Amazon Prime to satisfy my desire for a good movie. You know what I like about my list of valuables? It makes me feel safe and secure. I know that, in a financial emergency, I can lower my fixed expenses. I can always travel less, eat at home and drop my various subscriptions. My condominium and car are paid for. As a result, in a financial emergency, my fixed expenses would consist primarily of utilities, insurance, property taxes, food and homeowner’s association fees. I think of my low fixed expenses as a wall protecting me from financial disaster. Reducing expenses can be a first responder that saves you in a financial emergency. If your list of valuables, however, includes a payment on a luxury car, diamond necklaces or a Rolex watch, life can get stressful during hard times. Even if your expensive valuables are paid for, you have to ask yourself, would I have been better off putting that money into my retirement savings plan or a six-month emergency fund? It might feel good driving that luxury car. It won't feel so good when a financial emergency hits—and you don't have the resources to deal with it. Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include A Word of Advice, Lucky One and Friendly Reminder.
Read more »

Numbers

WHAT PERCENTAGE of U.S. adults own shares, either directly or through funds? A 2019 Gallup poll found that 55% said they’re invested in stocks, down from 63% in 2004 but up from 52% in 2013.

Home Call to Action

Manifesto

NO. 44: WE SHOULD view our debts as negative bonds. Instead of earning interest, we’re paying it. Tempted to buy bonds? First, we should see if we can earn more by paying down debt.

Truths

NO. 115: HOMES aren’t as safe an investment as they feel. A house is a big, undiversified and often leveraged investment bet. Yet owning a home seems less unnerving than owning stocks—because we don’t get constant price updates. The same illusion holds for other infrequently valued investments, like hedge funds, timber and private equity.

Act

LOOK FOR TAX savings—by reviewing your recent tax returns. Two danger signs: lots of interest income and realized capital gains, especially short-term capital gains. What to do? Avoid trading so much or, if necessary, confine it to a retirement account. Also use a retirement account to hold taxable bonds and other tax-inefficient investments.

Think

SHILLER P/E. Named after economist Robert Shiller, the Shiller price-earnings ratio—also known as the cyclically adjusted P/E ratio or CAPE—compares current stock prices to average inflation-adjusted earnings for the past 10 years. That smooths out cyclical fluctuations in corporate profits—a problem that can distort conventional P/E multiples.

Weight Problem

MICHAEL BURRY waited years to be rewarded for his bet against subprime mortgages. Actor Christian Bale, in the movie version of Michael Lewis’s book, The Big Short, portrays Burry curled up in the fetal position on the floor of his office. When the financial crisis finally hit in 2008, he made $100 million.
I’m no Michael Burry and the chance I’ll ever see $100 million is about 100 million to one.

Read more »

Staying Positive

PRESIDENT TRUMP recently criticized the Federal Reserve—yet again. Calling Fed Chair Jerome Powell and his colleagues “boneheads,” the president expressed frustration that they haven’t done more to lower interest rates. Specifically, the president said we should, “get our interest rates down to ZERO, or less.” That last part—“or less”—was key. Not only should rates be lower, he argued, but they should be below zero, as they have been in Europe.
Last week, the Fed did indeed cut short-term interest rates—by 0.25 percentage point.

Read more »

Timely Reminder

PAST PERFORMANCE is no guarantee of future results. But we keep hoping.
Over the 10 years through August 2009, the large-cap stocks in the S&P 500 shed an average 0.8% a year, even with dividends included. Meanwhile, U.S. value stocks beat U.S growth stocks, smaller-cap U.S. shares notched 5.5% a year, developed foreign stock markets 2.7% and emerging markets 10.4%.
Fast forward one decade, and the leaders have become laggards and vice versa. Over the 10 years through August 2019,

Read more »

Shame on Us

OVER 600 YEARS ago, Geoffrey Chaucer gave the world The Canterbury Tales, a caustic look at a cross-section of English society. While all the stories are still worth reading, one tale is especially relevant to today’s consumer.
For those who don’t remember The Canterbury Tales, it’s a story about a group of pilgrims traveling from London to Canterbury. They pass the time on the road by having a contest to see who can tell the best tale.

Read more »

What Number?

A DECADE AGO, a large financial firm ran a clever advertising campaign that showed people going about their everyday lives carrying a bright orange six- or seven-figure sum that represented their number—how much money they needed to retire. It was clever because we humans like to simplify—and sometimes oversimplify—complicated issues. It’s one of our cognitive biases.
I spent almost 40 years in aerospace engineering. I did a lot of detailed engineering analyses, calculating expected performance numbers,

Read more »

Educated Consumers

COLLEGE STUDENTS who borrow graduate with an average $37,000 in loans. While many people believe loans are the only way to finance a college education, that’s simply not the case. Here are five ways to get an advanced education while minimizing debt:
1. Stay close to home. Sure, it’s fun to think about moving across the country to go to school. But staying close to home after high school comes with several benefits.

Read more »

Free Newsletter

Numbers

WHAT PERCENTAGE of U.S. adults own shares, either directly or through funds? A 2019 Gallup poll found that 55% said they’re invested in stocks, down from 63% in 2004 but up from 52% in 2013.

Manifesto

NO. 44: WE SHOULD view our debts as negative bonds. Instead of earning interest, we’re paying it. Tempted to buy bonds? First, we should see if we can earn more by paying down debt.

Home Call to Action

Act

LOOK FOR TAX savings—by reviewing your recent tax returns. Two danger signs: lots of interest income and realized capital gains, especially short-term capital gains. What to do? Avoid trading so much or, if necessary, confine it to a retirement account. Also use a retirement account to hold taxable bonds and other tax-inefficient investments.

Truths

NO. 115: HOMES aren’t as safe an investment as they feel. A house is a big, undiversified and often leveraged investment bet. Yet owning a home seems less unnerving than owning stocks—because we don’t get constant price updates. The same illusion holds for other infrequently valued investments, like hedge funds, timber and private equity.

Think

SHILLER P/E. Named after economist Robert Shiller, the Shiller price-earnings ratio—also known as the cyclically adjusted P/E ratio or CAPE—compares current stock prices to average inflation-adjusted earnings for the past 10 years. That smooths out cyclical fluctuations in corporate profits—a problem that can distort conventional P/E multiples.

Money Guide

Start Here

Covered Calls

IN SEARCH OF EXTRA income, investors sometimes skip bonds—and instead sell call options against their stock portfolio. The buyers of these call options get the right to call away the underlying stock at a specified “strike” price either when the option expires or at any time up until the option’s expiration date. In return for that right, the buyers pay a premium to the sellers. Selling call options has two key drawbacks. First, trading options is a zero-sum game: For every winner, there’s a loser. In fact, it’s less than a zero-sum game once you factor in the trading costs involved. As a seller of call options, you’re the winner if the underlying stock goes nowhere, because you make a little extra dough by pocketing the call premium. But you could end up as the loser if the stock climbs above the strike price. You might miss out on big investment gains—and the call premium you received may not come close to compensating. That brings us to the second drawback. If you sell covered calls, you may see all of your good stocks called away and you might be left holding a bunch of duds. This could be more painful than you imagine. How so? Most years, the market’s performance is driven by a minority of stocks with strong performance, a phenomenon known as skewness. This shouldn’t be surprising: The most a stock can lose is 100% of its value, but the potential gain is unlimited. In many years, there will be a small number of stocks that score gains of 200%, 300% or more. If you write covered calls, your stocks that get called away could be among the market’s big winners. Want more income from your portfolio? You’ll likely achieve your goal at a lower investment cost, and with fewer hassles, by simply keeping a little less in stocks and a little more in bonds. Next: Asset No. 3: Cash Previous: Unit Investment Trusts Article: Got You Covered
Read more »

Archive

Taking Inventory

MY NEXT DOOR neighbor had her home burglarized. The thieves stole some expensive electronic equipment and jewelry. In the aftermath, I thought I should make a list of my valuable possessions and take a photo of each one, in case I ever have to file an insurance claim. Here’s my list of valuables: 1. Fender Telecaster guitar. Yes, that’s my complete list. I really don't own anything of value, other than that guitar, which my parents gave me in 1968 for my 17th birthday. I don't own any expensive jewelry or electronic equipment. My television is about 10 years old. I own an iPhone 5 worth $25 on a trade-in for a new phone. My other possessions are of no real value. I do own some watches and a ring that belonged to my father, which I keep in a safe deposit box. But their value is mostly sentimental. My list of valuable possessions also includes a small one-bedroom condominium and a 2010 Ford Fusion. Looking at that list, you might think I live a spartan life, but I feel it’s full and comfortable. I don’t hesitate to spend on things I value. Whenever I can get away, I like to travel. I enjoy dinning out with friends. I subscribe to a Major League Baseball cable package that allows me to watch my favorite team. I have satellite radio in my car, so I can listen to my favorite music. I subscribe to HBO, Showtime, Cinemax and Amazon Prime to satisfy my desire for a good movie. You know what I like about my list of valuables? It makes me feel safe and secure. I know that, in a financial emergency, I can lower my fixed expenses. I can always travel less, eat at home and drop my various subscriptions. My condominium and car are paid for. As a result, in a financial emergency, my fixed expenses would consist primarily of utilities, insurance, property taxes, food and homeowner’s association fees. I think of my low fixed expenses as a wall protecting me from financial disaster. Reducing expenses can be a first responder that saves you in a financial emergency. If your list of valuables, however, includes a payment on a luxury car, diamond necklaces or a Rolex watch, life can get stressful during hard times. Even if your expensive valuables are paid for, you have to ask yourself, would I have been better off putting that money into my retirement savings plan or a six-month emergency fund? It might feel good driving that luxury car. It won't feel so good when a financial emergency hits—and you don't have the resources to deal with it. Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include A Word of Advice, Lucky One and Friendly Reminder.
Read more »