Unexpected Bonus
Mike Zaccardi | Aug 3, 2021
FRUGALITY GETS A BAD rap these days. It seems today’s standard advice is to “go ahead and buy your darn daily latte.” Instead, we’re told to worry about bigger financial issues. That’s probably good advice. Small purchases here and there will likely boost our mood, while clipping coupons probably won’t move the net worth needle. Still, I’ve adopted a cheapskate practice that can be lucrative: brokerage firm retention bonuses. To snag these bonuses, you typically need a sizable IRA or taxable account. The strategy is to call up your brokerage firm and mention a juicy cash transfer offer you see at a competing asset manager. Don’t be surprised if the firm matches that offer if you simply stay put. I had this happen three times last year. I was simply looking to consolidate accounts, but none of the investment companies wanted me to leave. The result was more than $1,000 of retention bonus money plopped into one IRA and two taxable accounts. Be aware that you’ll receive a 1099 on a bonus paid to your taxable account. Another thing to consider: If you end up sticking with high-cost funds, that can effectively negate any cash bonus. For example, if you own an index fund at 0.14%, but could own the same thing for 0.04% elsewhere, that’s $500 per year of extra fees on a $500,000 position. I wasn’t looking to score retention bonuses a year ago. I just took what was offered. My plan (don’t tell anyone) is to try the same routine in about six months. I’ll let you know how it goes.
Read more » Yielding to Reality
Mike Zaccardi | Apr 11, 2022
IN THE MARKET FOR a home loan? Chances are, you aren’t pleased. Amid soaring real estate prices and intense demand, mortgage rates have climbed above the psychologically important 5% threshold. Mortgage News Daily published its rates update on Friday afternoon, and the figures weren’t pretty for prospective borrowers. The 5.06% average 30-year fixed-rate mortgage is close to the highest mark since late 2008. Meanwhile, over the past 12 months, home prices are up 19.2%, as measured by the S&P Case-Shiller U.S. National Home Price Index. That figure doesn’t reflect price changes since January, so we need to use other data to gauge whether the real estate market is cooling. Both Zillow and Redfin report robust home-price appreciation for the 12 months through February. At 20.3% and 15.8%, respectively, those barometers still don’t capture the dramatic rise in borrowing rates over the past handful of weeks. Conventional 30-year fixed-rate mortgages are priced off the 10-year Treasury yield. Currently, the 10-year note is at 2.71%. Historically, the 30-year mortgage rate averages about 1.7 percentage points above the yield on the 10-year note. That implies an expected home loan interest rate of 4.5%. The spread is higher than normal right now, much to the chagrin of those in the market for a mortgage. The rapid rise in market interest rates might be spooking lenders. Also driving the higher spread could be the Federal Reserve’s plan to shrink its mortgage-backed securities portfolio. The 10-year Treasury yield was near 1.7% on March 4. In just 25 trading days, it has skyrocketed to above 2.7%. On a percentage basis, that’s the most dramatic move in at least 40 years. Real estate price trends should be fascinating—and sobering—over the next few months. All of this, of course, means a big hit to housing affordability. Hot off the presses on Friday was February’s housing affordability index from the National Association of Realtors (NAR). Affordability is the worst since 2008. Imagine what the report will look like two months from now when the surge in mortgage rates gets factored in. Bank of America Global Research expects the NAR affordability index to post a record 30% year-over-year drop. What will this mean for the consumer? Perhaps retail sales will be pressured by the rising cost of servicing mortgages, though presumably those higher costs will only affect current home buyers and those with adjustable-rate mortgages. We’ll get a fresh read on consumer spending in Thursday’s retail sales report. Another potential shift is an increase in renting, as the cost of owning continues to march higher.
Read more » Close but No Cigar
Mike Zaccardi | May 23, 2022
BEAR MARKET territory. On Friday, that phrase was all over the “financial pornography” channel, as commentator Carl Richards labels it. During trading, the S&P 500 finally dropped 20% from its early January all-time closing high. In truth, that number alone doesn’t mean much. Consider that stocks in both 2011 and late 2018 briefly encroached on 20% before bouncing back in a big way.
The media was ready last week to go with all the flashing banners and alerts. But sure enough, stocks rallied hard before Friday’s closing bell, leaving the S&P less than 19% off its all-time high—meaning we aren’t yet “officially” in a bear market because such things are measured based on closing prices. Making the 20% figure even more meaningless: Much of the market has already suffered a much steeper decline. The big Nasdaq stocks are down almost 30% from their peak last November and small-cap shares are back where they traded in summer 2018.
Amid what might have felt like an awful week for the stock market, diversified investors fared fine. If you simply owned a target-date fund, gains in the bond market and among foreign stocks made for a boring week. With little mention from the media, bonds are back to cushioning stock volatility—at least for now.
Another green shoot: We’re seeing outperformance by small-cap stocks. Normally seen as higher risk than large-cap shares, smaller companies held up better last week when major consumer defensive companies reported poor earnings. Walmart and Target saw huge single-day declines in response to profit margin pressures. It was a rude awakening for those who had sought safety in these household names.
Last week also offered a reminder not to get too cute with your portfolio. Who’d have thought that the sort of badly pummeled stocks owned by Cathie Wood’s ARK Innovation ETF would be the place to ride out last week’s market turmoil? That kind of price action might signal we’re closer to the end of this market slide than many pessimistic TV prognosticators think.
Read more » Not So Terrible
Mike Zaccardi | Feb 14, 2022
THERE WAS MUCH hoopla last week about high inflation, surging interest rates and geopolitical turmoil. Sure, these are important macro conditions. Still, stocks took things in stride. If you only pay attention to once-highflying growth companies, especially tech stocks, the market appears dire. Broaden your perspective, though, and things haven’t been all that terrible of late. Yes, the S&P 500 lost 1.8% last week. Small-caps, however, were up 1.5%. Foreign shares were about unchanged. The U.S. bond market, despite one of its worst days of the past decade on Thursday, was down just 0.4%. Traders' heads are still spinning after a wild earnings season. From company-specific volatility to U.S. economic headlines to the Russia-Ukraine crisis, investors might be on edge. But there are some encouraging signs. Most stocks remain above their Jan. 27 lows. Diversified investors—who likely underperformed last year—have benefited from international exposure in 2022. Vanguard FTSE Emerging Markets ETF (symbol: VWO) is positive year-to-date, while foreign developed market stocks have beaten the S&P 500 by 3.5 percentage points in 2022. Another green shoot: Small-cap stocks have turned up versus large-caps. The iShares Russell 2000 ETF (IWM) has outpaced the S&P 500 by almost four percentage points since Feb. 2. While a short timeframe, that could be a sign that not everyone is risk-averse right now. Many small speculative stocks have endured a tough year. While the iShares Russell 2000 ETF has lately held up well, it’s down more than 10% over the trailing 52 weeks. Given the extended duration and magnitude of the decline among small company stocks, now might be a decent time to buy. It’s humbling how quickly financial markets can turn from optimism to fear. There’s no shortage of risks to worry about right now. But that often means opportunity for those investors who focus on the long run.
Read more » Build Your Own?
Mike Zaccardi | Oct 10, 2021
THE LATEST BIG NEWS in the money management world: Vanguard Group said it had completed the acquisition of Just Invest, while Franklin Templeton announced it was buying O'Shaughnessy Asset Management. With these purchases, the two firms entered the direct indexing arena in a big way. Direct indexing—or custom indexing—involves using quantitative tools to tailor a portfolio’s individual stock and bond holdings to each investor’s preferences. Say you don’t want to own tobacco stocks. No problem. The direct indexing system constructs your portfolio to hold all companies except smoking stocks. Some say direct indexing is just active management in disguise. Those critics assert that investors should be wary of fees that are higher than off-the-shelf index funds. Meanwhile, proponents contend that direct indexing offers a host of benefits, including these three: 1. Automated tax management. Direct indexing can perform tax-loss harvesting, realizing capital losses to offset existing gains and potentially generating an additional $3,000 in losses to offset ordinary income. 2. Behavioral benefits. Think “the Ikea effect.” When people build something themselves, they don't want to let it go. If you craft a portfolio based on your wants, you might be more likely to stick with it when markets turn sour. 3. Managing concentrated positions. In the past, J.P. Morgan Asset Management has published a chart in its Guide to the Markets showing how investors in certain regions were overweighted in specific sectors, such as energy stocks in the South and technology shares in the West. One reason: Employers compensate workers with company stock. Direct indexing could help mitigate this concentration risk by creating portfolios that avoid additional shares from the same sector. Direct indexing is getting a lot of buzz in the financial advisory world. But I don’t think investors should rush in. Let others figure out whether the concept has legs. You won’t go far wrong sticking with those off-the-shelf index funds.
Read more » No Comparison
Mike Zaccardi | Jan 5, 2022
TARGET-DATE FUNDS from Vanguard Group are, I believe, fantastic products. My first investment was a $3,000 purchase of Vanguard Target Date 2045 Fund (symbol: VTIVX) in late December 2005, shortly after I turned age 18. That was also my first Roth IRA contribution. A target-date fund is an off-the-shelf globally diversified portfolio that automatically becomes more conservative over time. You don’t have to do any fiddling with the allocation, such as rebalancing or adjusting down your portfolio’s risk level. It’s a terrific, hands-off investment vehicle for building long-term wealth. I’m concerned at the moment, however. Last year featured monster gains in the S&P 500 and Nasdaq 100. Even the broad Vanguard Total Stock Market ETF (VTI) returned almost 26% in 2021. By contrast, Vanguard Target Retirement 2060 Fund (VTTSX) was up “just” 16%. While that gain is nothing to sniff at, relative return differences can be powerful. And dangerous. I fear that 401(k) plan participants will see 2021 returns early this year and simply allocate to the biggest winners. That might be fine—owning a low-cost S&P 500 index fund will probably work out okay over the decades ahead. Still, a large-cap U.S. index fund misses out on the diversification benefits that come with owning other stock market segments, such as U.S. small-cap stocks and foreign shares. Recency bias plagues us as investors. If we aren’t careful, we can pick the hot index fund one year, and then ditch it when it has the inevitable stretch of sour returns compared to other index funds. Target-date funds help keep that kind of performance chasing in check. My tip: As you review your portfolio, don’t get lulled into thinking that what worked over the past few years will keep winning. A diversified, low-cost approach that doesn’t require tinkering is a solid strategy for long-term investment success.
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Loneliness
I tried calling Mark, my old high school friend, a couple of weeks ago, and I haven’t heard from him. I tried again and got a message that his mailbox was full. I texted him asking him to call me when he had time. This isn’t like him. I’m beginning to think there’s something wrong. He has health issues, and when you’re my age, you think the worst. I can’t keep track of all the people who were a part of my life who have passed away since I retired. Some of them I was extremely close to and will be terribly missed. I never thought that when I retired, I would be more concerned about running out of friends than running out of money. If I ever lost Rachel, and I keep losing friends, I think I’d need to move into a retirement community just to have more people around me. The silence would be too much. Stock Market Lately, it feels like the economy has been built for people like me — retirees who already own their homes and have money in the stock market. I never expected our net worth would jump this much these past couple of years. The rise in real estate prices and the AI-fueled market boom have nudged Rachel and me into spending more freely. We eat out more than we used to — not fancy places. We even booked business-class seats on our last trip, something I never imagined I’d do. And lately, I’ve been walking around the house noticing little projects and thinking: Why not? Let’s fix that. But underneath all that comfort is a knot in my stomach. If this AI boom fizzles, the wealth effect that’s padded our lives could disappear just as quickly. Every time I read that Nvidia now makes up around 8% of the S&P 500 and the “Magnificent Seven” accounts for about 35% of the index, I feel a twinge of the same uneasiness I had during the dot-com era. I keep asking myself: Are we all betting too much on too few companies? These few companies are spending billions of dollars on AI. The question on many investors’ minds is whether they will make enough money off AI to recoup their investments and turn a profit. Still, I’m not changing my portfolio. Maybe it’s trust that things will settle. The market has risen so much that I’d probably be fine even if it slid. And unlike the dot-com days, these companies at least make real money. Even so, something about this AI rush feels fragile. Like we’re all enjoying the party while quietly wondering when the music will stop.The Economy for Others
What worries me even more is that this strong economy doesn’t seem to be helping everyone. It’s so hard for younger people to buy their first home — the median first-time buyer is 40 now. Airlines are struggling more with filling economy seats than business class ones. And one out of eight people in this country depends on SNAP just to buy food. I’ve also been reading about how tough the job market is for recent college grads, partly because AI is reshaping entry-level work. I sometimes wonder whether my son-in-law will ever feel like he’s on the same financial footing we had at his age. He’s got a good job, but the economy doesn’t seem geared toward helping the younger generation or those who are struggling. All of this leaves me in a strange place emotionally. On one hand, I know I’ve benefited from this market boom — more than I probably deserve. On the other hand, I’m not blind to the fact that this same economy feels like a completely different world for people who aren’t retired homeowners with investments. I can enjoy the comfort it’s given Rachel and me, but I can’t ignore the uncomfortable thought that the system seems to be lifting some of us up while quietly letting others slip behind. Will I get the health care I need when I need it? One thing I never expected to worry about in my 70s is whether I’ll be able to see a doctor when I need one. My urologist — the same one who has always returned my calls and squeezed me in when something felt off — is switching to a concierge practice. He says he wanted to offer “more personalized care.” Then he handed me a brochure with fees ranging from $1,200 a year for the basic level to $12,000 for the premier package. None of it’s covered by Medicare. These fees do not include the additional services listed in his contract agreement that go beyond what Medicare pays. I sat there thinking: I just need a doctor who answers the phone when it matters. Even he admitted the new setup might not be a good fit for me and suggested I find another urologist. When I walked out of his office, I felt like losing another person I had depended on. Now, I’m concerned that I won’t be able to find another doctor who will be there for me when I need care. It already takes seven months to see my geriatric doctor. My dermatologist is booked months out, too. Everyone keeps saying that older adults will need more medical care, but the system feels like it’s shrinking right when I’m finally entering the phase of life when I need it most. I try not to dwell on it, but sometimes I imagine waking up one morning and seeing blood in my urine again and not knowing who to call. It’s an unsettling feeling — the kind that lingers and makes you realize how much you took for granted when you were younger. Although I have these concerns, I’m thankful every day for Rachel, for the life we’ve built, and for the good fortune we’ve had. But retirement isn’t the carefree stretch of leisure I once imagined. It’s a period of adjustment — to loss, to uncertainty, to an economy and a health-care system that feel less predictable than ever.