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The big gain from homeownership is the imputed rent: the ability to live in the place. That’s highly valuable—but immediately consumed.

Helping Them Along

MOST OF US want to help our children financially. But we also want to avoid thwarting their ambition or unintentionally instilling bad money habits. And, no, this isn’t just a problem for the wealthy: All too many kids who grow up in middle-class households end up as financially irresponsible adults.
How can we avoid that fate, while still helping our children financially? Below are five strategies. The first three are cost-free and the other two don’t necessarily require serious sums of money:
1.

Read more »

Muddling Through

DESPITE MY independent nature, I called family and friends after my injury. I thanked them for what they’d already done following my husband’s death—and requested additional, more intensive support.
One aunt, a government employee, arranged to work for a week at a nearby federal building. My sister-in-law also came for a week, and a cousin who is a nurse volunteered, too. A professional colleague parked her RV in the driveway and brought along her friendly pooch.

Read more »

Why We Try

BEATING THE STOCK market over the long term is no mean feat. Only a tiny proportion of investors—professional or otherwise—manage to do it. So why do so many people think they can?
Meir Statman, a finance professor at Santa Clara University, cites eight key reasons. In a new monograph titled Behavioral Finance: The Second Generation, he slots these reasons into two broad categories—five cognitive and emotional errors, followed by three expressive and emotional benefits:
1.

Read more »

Seven Paradoxes

“THE INVESTOR’S CHIEF problem—even his worst enemy—is likely himself.” So wrote Benjamin Graham, the father of modern investment analysis.
With these words, written in 1949, Graham acknowledged the reality that investors are human. Though he had written an 800-page book on techniques to analyze stocks and bonds, Graham understood that investing is as much about human psychology as it is about numerical analysis.
In the decades since Graham’s passing, an entire field has emerged at the intersection of psychology and finance.

Read more »

Just in Time

I USED TO THINK anybody could be taught to manage money sensibly. I no longer believe that.
When I was in my 20s and scraping by on a junior reporter’s salary, I had some sense for the financial stress suffered by everyday Americans. But after a handful of years of diligently saving, I was able to escape those daily worries. Many Americans, alas, never do.
This was hammered home when I recently took the financial well-being questionnaire offered by the Consumer Financial Protection Bureau (CFPB).

Read more »

Our To-Do List

I HAVE NEVER broken a New Year’s resolution—because, until this year, I’ve never made one. But now that I’m retired, with time on my hands, I figure my wife and I ought to challenge ourselves with 10 financial resolutions for 2020:

We’ll continually monitor routine spending with the goal of reducing or eliminating at least half-a-dozen expenses this year. That’s one every two months. Phone companies, internet providers and insurers, be warned: Here we come.

Read more »

Money Guide

Indexing Dangerous?

AS INDEX FUNDS garner ever more assets, proponents of active management have all but given up claiming that there are reliable strategies for beating the stock market averages. Instead, they've sought to persuade folks that they should avoid index funds, because indexing is bad for the smooth functioning of the stock market. In essence, investors are being told, “We know that, on average, indexing beats active management. But you should still trade stocks and buy actively managed funds, because we need folks like you to ensure we have liquid markets without major mispricings.” The goal of investing is to make money, so this seems like a bizarre argument. But is it in any way justified? It’s hard to know precisely how much of U.S. and foreign stock market value is in passively managed strategies that simply seek to replicate the performance of a market index like the S&P 500 or the Russell 2000. But we know indexing is far more popular in the U.S. than elsewhere—and yet, even in the U.S., the most generous estimates suggest that less than half of the stock market’s total value is held by index mutual funds, exchange-traded index funds and other passive strategies. Moreover, if the goal is to ensure there’s a liquid, efficient market where investors can readily buy and sell, what’s important isn’t how much money is actively managed, but rather how active that money is. On that score, there seems little reason to worry. Stock trading in the U.S. is as vigorous as ever, despite the flood of money into index funds. In fact, according to World Bank figures, the annual value of U.S. stock trading was $33 trillion in 2018, up 168% over the past two decades. How much more buying and selling do we need to have a well-functioning market? If there are no signs that the U.S. stock market is about to grind to a halt from lack of trading, why all the handwringing over the growth of indexing? As always on Wall Street, you need to follow the money. Just as the Street has a financial incentive to belittle the intelligence of small investors, it also makes far more money from active money management than from index funds. What if the Street can persuade investors to stick with active management? Those investors will, on average, be worse off—but Wall Street's bottom line will be fatter. Next: Bonds or Bond Funds? Previous: Stocks Overpriced? Articles: Why We Try and Passive Stampede?
Read more »

Archive

Making Your Case

MRS. J. LIVED in southeast Virginia and had purchased an eight-year-old truck at auction for her college-bound child. It turns out that the truck had spent its entire life in and around Rochester, New York, in the heart of the Rust Belt. Mrs. J. had been advised by her local garage that many of the exposed chassis components on her truck were covered in rust. Her neighbors’ cars did not exhibit this condition. She felt the truck was unsafe and that the vehicle’s manufacturer—my employer—owed her a solution. After a thorough inspection, I began to explain that the truck was not unsafe, no defects were present and no warranty would apply even if there were. Mrs. J. began a vituperative crescendo that was majestic to behold. Each time she came up for air, her pronouncements increased by an octave, as she advised everyone within earshot of the wretchedness of my employer and the clearly impure breeding of which I was a result. She swore apocalyptic consequences for my recalcitrance. The outcome was not positive for Mrs. J.  What about me? For my trouble, I got a story to share. As a technical representative for my employer, I get to interact with customers who have a problem with their car and are unable to reach a satisfactory resolution with our dealer network. Having worked with a number of these customers over the years, I feel qualified to advise on what behaviors are helpful in reaching a happy conclusion. It’s not convenient for anyone. You took time from your day to drive to the dealer and meet with a rep from the factory, when you’d rather be getting your nails done. I get it. The person dispatched to look at your car may be days away from home and has a pile of other pressing matters as well. Be prepared to present your case in a way that supports an efficient resolution. Which means: Know what’s covered. It helps to peruse the tiny book that summarizes your warranty coverage. If you purchased a new car, it is in the glove box next to the owner’s manual, both no doubt still wrapped in plastic. No matter how much you paid, or how entitled you feel, that little book defines what you are owed with heartless precision. The warranty covers defects under specified conditions. Outside of those conditions, you may receive assistance with your problem. But you will need to explain why it is in the manufacturer’s best interest to help you. My first question will be: Are you my customer? Applying out-of-warranty assistance is a business decision. If you have a history of purchases from the brand, and your car has been routinely serviced in the dealer network, you have set yourself up for special consideration. If you bought the car at auction, haven’t seen a dealer in 60,000 miles and you’re out of the specified warranty coverage, the problem you’re having is yours alone. It is your burden to demonstrate the defect. Manufacturers are unlikely to attempt a repair for a problem that cannot be demonstrated. If the problem is intermittent, it helps if you have a detailed record of each occurrence, the conditions during which you noticed the problem and how the problem was resolved. This may help the inspector understand and diagnose your concern. Tell me the truth. This is not my first rodeo. I have inspected hundreds, and perhaps thousands, of cars. Your car is speaking to me from the moment I approach it. Don’t tell me the seat stains just showed up when the seat belts and headliner tell another story. Don’t tell me the part simply fell off when the adjacent parts tell me there was an impact. I once had a customer tell me that the scratches on his windshield “just showed up and must be a defect.” I stared at him in silence as his conscience went to work. When he finally apologized and told me what happened, I helped him with his problem. And not because I had to. The issue is not a defect, but I still want it fixed. Sometimes the condition you object to is not a defect, but a design element you dislike. I am not allowed to make unauthorized modifications to your car. Even when I have nothing else to offer, your opinion can support changes that will improve future products or spur developments that may be applied to your car at some future date. Be civil. Shouting at the person responsible for a final position on your case will rarely get you more than is absolutely required from the manufacturer. Disparaging remarks about me, my mother or my employer are never helpful. “I’ll never buy another one of your products” voids any interest I have in helping you and any hope you have of a positive outcome. If you have trouble keeping your cool, send a trusty advocate that can present your case in a civil way. Expect the same in return. If you don’t get your desired result, it doesn’t necessarily mean the outcome was unfair. But if you are not treated with courtesy and respect, please report your experience to the manufacturer’s call center. Incivility is never appropriate, regardless of the cultural decay we witness daily. We all want the same outcome. Auto (and most other) manufacturers work in very competitive marketplaces that are highly dependent on customer perception. If the issue with your product can be resolved in a way that makes you smile, the manufacturer wants that outcome. I want that outcome. I am looking for reasons to say “yes.” Help me find them. When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland. His previous blogs were Course CorrectionA Thanksgiving Prayer and Life After Amazon. You can contact Phil via LinkedIn.
Read more »

Numbers

THE TYPICAL U.S. homeowner is 55 years old and has lived for 14 years in a home built in 1978, reports the National Association of Realtors. Some 64% of U.S. families own their primary residence.

Home Call to Action

Manifesto

NO. 12: WE SHOULD focus less on the odds of something happening and more on the consequences. We likely won’t die during our working years. But if we did, how would our family cope?

Truths

NO. 7: GREAT RETURNS are a bad reason to save less. Thanks to strong investment performance, you may be closer than expected to your target nest egg. But if the markets have raced ahead of underlying fundamentals, the big returns may have effectively borrowed from the future, weaker results might lie ahead—and saving less could imperil your goals.

Act

ADD UP YOUR FIXED living costs. Include mortgage or rent, car payments, property taxes, insurance premiums and other recurring monthly expenses. How long could you cover these costs if you lost your job? Are these expenses so high you find it tough to save—and suffer constant financial stress? Our advice: Keep fixed costs below 50% of pretax monthly income.

Think

EFFICIENT FRONTIER. What mix of investments offers the highest expected return for a given level of risk—or the lowest risk for a target return? In theory, these optimal portfolios can be found on the so-called efficient frontier. Their key characteristic: broad diversification, thus reducing volatility by combining investments that don’t always move in sync.

Helping Them Along

MOST OF US want to help our children financially. But we also want to avoid thwarting their ambition or unintentionally instilling bad money habits. And, no, this isn’t just a problem for the wealthy: All too many kids who grow up in middle-class households end up as financially irresponsible adults.
How can we avoid that fate, while still helping our children financially? Below are five strategies. The first three are cost-free and the other two don’t necessarily require serious sums of money:
1.

Read more »

Muddling Through

DESPITE MY independent nature, I called family and friends after my injury. I thanked them for what they’d already done following my husband’s death—and requested additional, more intensive support.
One aunt, a government employee, arranged to work for a week at a nearby federal building. My sister-in-law also came for a week, and a cousin who is a nurse volunteered, too. A professional colleague parked her RV in the driveway and brought along her friendly pooch.

Read more »

Why We Try

BEATING THE STOCK market over the long term is no mean feat. Only a tiny proportion of investors—professional or otherwise—manage to do it. So why do so many people think they can?
Meir Statman, a finance professor at Santa Clara University, cites eight key reasons. In a new monograph titled Behavioral Finance: The Second Generation, he slots these reasons into two broad categories—five cognitive and emotional errors, followed by three expressive and emotional benefits:
1.

Read more »

Seven Paradoxes

“THE INVESTOR’S CHIEF problem—even his worst enemy—is likely himself.” So wrote Benjamin Graham, the father of modern investment analysis.
With these words, written in 1949, Graham acknowledged the reality that investors are human. Though he had written an 800-page book on techniques to analyze stocks and bonds, Graham understood that investing is as much about human psychology as it is about numerical analysis.
In the decades since Graham’s passing, an entire field has emerged at the intersection of psychology and finance.

Read more »

Just in Time

I USED TO THINK anybody could be taught to manage money sensibly. I no longer believe that.
When I was in my 20s and scraping by on a junior reporter’s salary, I had some sense for the financial stress suffered by everyday Americans. But after a handful of years of diligently saving, I was able to escape those daily worries. Many Americans, alas, never do.
This was hammered home when I recently took the financial well-being questionnaire offered by the Consumer Financial Protection Bureau (CFPB).

Read more »

Our To-Do List

I HAVE NEVER broken a New Year’s resolution—because, until this year, I’ve never made one. But now that I’m retired, with time on my hands, I figure my wife and I ought to challenge ourselves with 10 financial resolutions for 2020:

We’ll continually monitor routine spending with the goal of reducing or eliminating at least half-a-dozen expenses this year. That’s one every two months. Phone companies, internet providers and insurers, be warned: Here we come.

Read more »

Free Newsletter

Numbers

THE TYPICAL U.S. homeowner is 55 years old and has lived for 14 years in a home built in 1978, reports the National Association of Realtors. Some 64% of U.S. families own their primary residence.

Manifesto

NO. 12: WE SHOULD focus less on the odds of something happening and more on the consequences. We likely won’t die during our working years. But if we did, how would our family cope?

Home Call to Action

Act

ADD UP YOUR FIXED living costs. Include mortgage or rent, car payments, property taxes, insurance premiums and other recurring monthly expenses. How long could you cover these costs if you lost your job? Are these expenses so high you find it tough to save—and suffer constant financial stress? Our advice: Keep fixed costs below 50% of pretax monthly income.

Truths

NO. 7: GREAT RETURNS are a bad reason to save less. Thanks to strong investment performance, you may be closer than expected to your target nest egg. But if the markets have raced ahead of underlying fundamentals, the big returns may have effectively borrowed from the future, weaker results might lie ahead—and saving less could imperil your goals.

Think

EFFICIENT FRONTIER. What mix of investments offers the highest expected return for a given level of risk—or the lowest risk for a target return? In theory, these optimal portfolios can be found on the so-called efficient frontier. Their key characteristic: broad diversification, thus reducing volatility by combining investments that don’t always move in sync.

Money Guide

Start Here

Indexing Dangerous?

AS INDEX FUNDS garner ever more assets, proponents of active management have all but given up claiming that there are reliable strategies for beating the stock market averages. Instead, they've sought to persuade folks that they should avoid index funds, because indexing is bad for the smooth functioning of the stock market. In essence, investors are being told, “We know that, on average, indexing beats active management. But you should still trade stocks and buy actively managed funds, because we need folks like you to ensure we have liquid markets without major mispricings.” The goal of investing is to make money, so this seems like a bizarre argument. But is it in any way justified? It’s hard to know precisely how much of U.S. and foreign stock market value is in passively managed strategies that simply seek to replicate the performance of a market index like the S&P 500 or the Russell 2000. But we know indexing is far more popular in the U.S. than elsewhere—and yet, even in the U.S., the most generous estimates suggest that less than half of the stock market’s total value is held by index mutual funds, exchange-traded index funds and other passive strategies. Moreover, if the goal is to ensure there’s a liquid, efficient market where investors can readily buy and sell, what’s important isn’t how much money is actively managed, but rather how active that money is. On that score, there seems little reason to worry. Stock trading in the U.S. is as vigorous as ever, despite the flood of money into index funds. In fact, according to World Bank figures, the annual value of U.S. stock trading was $33 trillion in 2018, up 168% over the past two decades. How much more buying and selling do we need to have a well-functioning market? If there are no signs that the U.S. stock market is about to grind to a halt from lack of trading, why all the handwringing over the growth of indexing? As always on Wall Street, you need to follow the money. Just as the Street has a financial incentive to belittle the intelligence of small investors, it also makes far more money from active money management than from index funds. What if the Street can persuade investors to stick with active management? Those investors will, on average, be worse off—but Wall Street's bottom line will be fatter. Next: Bonds or Bond Funds? Previous: Stocks Overpriced? Articles: Why We Try and Passive Stampede?
Read more »

Archive

Making Your Case

MRS. J. LIVED in southeast Virginia and had purchased an eight-year-old truck at auction for her college-bound child. It turns out that the truck had spent its entire life in and around Rochester, New York, in the heart of the Rust Belt. Mrs. J. had been advised by her local garage that many of the exposed chassis components on her truck were covered in rust. Her neighbors’ cars did not exhibit this condition. She felt the truck was unsafe and that the vehicle’s manufacturer—my employer—owed her a solution. After a thorough inspection, I began to explain that the truck was not unsafe, no defects were present and no warranty would apply even if there were. Mrs. J. began a vituperative crescendo that was majestic to behold. Each time she came up for air, her pronouncements increased by an octave, as she advised everyone within earshot of the wretchedness of my employer and the clearly impure breeding of which I was a result. She swore apocalyptic consequences for my recalcitrance. The outcome was not positive for Mrs. J.  What about me? For my trouble, I got a story to share. As a technical representative for my employer, I get to interact with customers who have a problem with their car and are unable to reach a satisfactory resolution with our dealer network. Having worked with a number of these customers over the years, I feel qualified to advise on what behaviors are helpful in reaching a happy conclusion. It’s not convenient for anyone. You took time from your day to drive to the dealer and meet with a rep from the factory, when you’d rather be getting your nails done. I get it. The person dispatched to look at your car may be days away from home and has a pile of other pressing matters as well. Be prepared to present your case in a way that supports an efficient resolution. Which means: Know what’s covered. It helps to peruse the tiny book that summarizes your warranty coverage. If you purchased a new car, it is in the glove box next to the owner’s manual, both no doubt still wrapped in plastic. No matter how much you paid, or how entitled you feel, that little book defines what you are owed with heartless precision. The warranty covers defects under specified conditions. Outside of those conditions, you may receive assistance with your problem. But you will need to explain why it is in the manufacturer’s best interest to help you. My first question will be: Are you my customer? Applying out-of-warranty assistance is a business decision. If you have a history of purchases from the brand, and your car has been routinely serviced in the dealer network, you have set yourself up for special consideration. If you bought the car at auction, haven’t seen a dealer in 60,000 miles and you’re out of the specified warranty coverage, the problem you’re having is yours alone. It is your burden to demonstrate the defect. Manufacturers are unlikely to attempt a repair for a problem that cannot be demonstrated. If the problem is intermittent, it helps if you have a detailed record of each occurrence, the conditions during which you noticed the problem and how the problem was resolved. This may help the inspector understand and diagnose your concern. Tell me the truth. This is not my first rodeo. I have inspected hundreds, and perhaps thousands, of cars. Your car is speaking to me from the moment I approach it. Don’t tell me the seat stains just showed up when the seat belts and headliner tell another story. Don’t tell me the part simply fell off when the adjacent parts tell me there was an impact. I once had a customer tell me that the scratches on his windshield “just showed up and must be a defect.” I stared at him in silence as his conscience went to work. When he finally apologized and told me what happened, I helped him with his problem. And not because I had to. The issue is not a defect, but I still want it fixed. Sometimes the condition you object to is not a defect, but a design element you dislike. I am not allowed to make unauthorized modifications to your car. Even when I have nothing else to offer, your opinion can support changes that will improve future products or spur developments that may be applied to your car at some future date. Be civil. Shouting at the person responsible for a final position on your case will rarely get you more than is absolutely required from the manufacturer. Disparaging remarks about me, my mother or my employer are never helpful. “I’ll never buy another one of your products” voids any interest I have in helping you and any hope you have of a positive outcome. If you have trouble keeping your cool, send a trusty advocate that can present your case in a civil way. Expect the same in return. If you don’t get your desired result, it doesn’t necessarily mean the outcome was unfair. But if you are not treated with courtesy and respect, please report your experience to the manufacturer’s call center. Incivility is never appropriate, regardless of the cultural decay we witness daily. We all want the same outcome. Auto (and most other) manufacturers work in very competitive marketplaces that are highly dependent on customer perception. If the issue with your product can be resolved in a way that makes you smile, the manufacturer wants that outcome. I want that outcome. I am looking for reasons to say “yes.” Help me find them. When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland. His previous blogs were Course CorrectionA Thanksgiving Prayer and Life After Amazon. You can contact Phil via LinkedIn.
Read more »