THE FEDERAL government recently issued its monthly inflation report. The resulting headlines could have put you to sleep: “Consumer Price Index Rises 0.2% in April.” It would have been easy to skip over this seemingly insignificant story for two reasons: First, the way the government reports inflation data, focusing on the monthly increase, isn’t terribly meaningful. Second, even if you looked at the annual rate, which is 2.5%, inflation just doesn’t seem like much of a concern.
EVERYBODY WANTS easy answers. But often, things aren’t so simple, especially when it comes to financial conundrums. Consider the four common money questions below—and the rules of thumb that folks frequently rely on.
1. How much do I need saved for retirement? Type this question into Google and most of the answers will recommend that you save some multiple of your income. Some suggest eight-to-10 times income, while others recommend as much as 25 times.
WHEN ASKED WHY he robbed banks, Willie Sutton replied, “because that’s where the money is.”
Similarly, private investment funds—such as hedge funds and private equity funds—are attractive to high net worth investors, because they carry the potential for outsized returns. That, supposedly, is where the big money is. Several factors explain this potential. Among them: These funds not only use leverage to increase the size of their investment bets, but also they may buy investments that aren’t publicly traded—and hence they could receive higher returns because these investments are mispriced or as an inducement to accept their illiquidity.
SHOULD YOU INVEST in the stock market? The answer seems obvious: Over the past 90 years, stocks have returned an average 10% a year, far outpacing bonds at 5% and cash investments at less than 3%.
So why ask the question? The reason is the word “average.” Stock market returns are, of course, uneven from year to year and uneven from stock to stock. That’s well known. But the degree to which stock performance varies from stock to stock may surprise you—and that has implications for how you invest.
I REMEMBER SPEAKING with an industry colleague about a company that had been in the news. He told me that he liked the company’s stock and, in fact, had bought it for the mutual fund he managed. Then he added, parenthetically, “I owned it, then I sold it, then I bought it back.”
This discussion highlights a fundamental challenge for investors: Mutual fund managers face incentives that often diverge from their clients. Specifically, fund managers are graded and compensated for their performance before taxes.
ERIC SCHMIDT SAID this when he was Google’s chief executive: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”
In his Congressional testimony last week, Facebook chief executive Mark Zuckerberg didn’t say anything nearly as condescending or abrasive. But his testimony was a good reminder that we’re in a very different world privacy-wise than we were even 10 years ago,
ANYONE WHO FOLLOWS my work knows I am a staunch advocate of index funds and believe that stock-picking is a difficult road. That said, there are three undeniable facts about picking stocks:
All of the great fortunes—Rockefeller, Carnegie, Gates, Buffett—were built by owning one stock: a very good one but, nonetheless, just one.
There are rare investors who are able to outperform the market averages by picking the right stocks. It’s hard, but it can be done.
IS FINANCIAL PLANNING a product or a process? In other words, is a financial plan a document that you can print, bind and put on your shelf—or is it an ongoing activity? This is something of a religious debate within the finance community.
Supporters of the “it’s a product” view are usually dyed-in-the-wool financial planners. Not surprisingly, they believe that financial planning should result in a physical plan—an exhaustive, detailed document that’s full of analysis and projections.
PERHAPS YOU’VE HEARD the expression, “There’s no free lunch.” The idea is, you usually don’t receive something for nothing. Whether it’s with money or with time and labor, you almost always “pay” one way or another.
It’s an interesting concept—but whoever coined the phrase clearly never looked at the U.S. tax code, which is full of free lunches. Today, we’ll discuss one example, which may be of interest to the charitably inclined.
One of the most talked about changes in the new tax law is a provision that alters how deductions are treated.
UNIVERSITY of California finance professors Brad Barber and Terrance Odean published a research paper on investor behavior in early 2000. The results weren’t pretty. By their reckoning, individual investors lagged the overall market by an average of almost four percentage points a year. The culprit: the costs involved in trading individual stocks.
It isn’t just individuals who struggle with stock-picking. Professional money managers, on average, also trail behind the overall market. Over the past five years,
ON THE AFTERNOON of Sunday, Sept. 28, 1941, it was cool and damp in Philadelphia. Inside Shibe Park, where the hometown Athletics were suiting up to face the Red Sox, all eyes were on Boston’s 23-year-old slugger, Ted Williams. It was the last day of the regular season, and Williams’s average stood just a hair short of .400, at .39955.
According to baseball’s official rules, this would have rounded up to an even .400 in the record books,
SOMETIMES WE DON’T give kids enough credit. Last week, my first-grader reminded me of this fact. On a trip to CVS, he was looking through the drink cooler, when he asked, “What’s Smartwater?” Before I could answer, he started with his own commentary. Seeing the price tag—which was more than double that of the regular water next to it—he wondered, “Why’s it smart? It’s just water. Is it really going to make me smart?”
This made me realize something: As consumers,
THERE’S A NEW TYPE of financial fraud on the rise: tax refund theft. All an identify thief needs are an individual’s name and Social Security number. This information, unfortunately, is readily available. In a single incident in 2017, thieves stole information on almost half of all Americans from credit reporting agency Equifax.
Using this information, thieves then prepare and file a fake tax return in such a way that it appears a large refund is due.
“IN THIS WORLD,” Ben Franklin famously once wrote, “nothing can be said to be certain, except death and taxes.” But I would also argue that neither is completely out of our hands.
When it comes to our health, we all know that we should exercise, eat right and go for regular checkups. And when it comes to our tax bill, there’s quite a bit we can do to minimize it, especially in retirement. Below,
IN AUGUST 2004, venture capitalist Peter Thiel sat down to listen to a pitch from a 20-year-old entrepreneur named Mark Zuckerberg. It didn’t take long for Thiel to make up his mind. According to most accounts, they met in the morning and, after a short break for lunch, Thiel committed to buying 10% of Zuckerberg’s new company, Facebook.
In hindsight, this was clearly a smart move, making Thiel a billionaire. But while it was certainly a great investment,