Toiling Round the Clock August 29, 1997February 3, 2017 Labor. Work. Effort. Sometimes, you can try too hard. “We don’t just offer you fresh squeezed orange juice in the morning,” crows the hotel. “We squeeze it fresh for you the night before!” It’s all well and good to labor mightily at investing, but unless you have a great deal of money to manage — and perhaps even then — I don’t think it makes sense. So it’s never particularly bothered me that I have to wait until the market opens to buy or sell a stock. It’s never really killed me that the market’s closed on Labor Day. But wait! “What exactly is after hours trading?” queries SuperJeff. “It sounds like the market doesn’t always lock the doors when closing time arrives.” The answer is that I’ve never paid much attention to this, other than hearing, like you, that such-and-such stock “fell three points in after-hours trading.” After-hours trading isn’t available to us little guys — and just as well that it’s not. Are we really going to know some big news about a stock or the economy before anyone else? No. And once it is known, the price you get or pay in after-hours trading instantly reflects smart people’s assessment of that news. But SuperJeff’s question made me realize how little I knew about this, so I forwarded it to a pro — he’s had spectacular success on Wall Street — to get the straight scoop. He didn’t know, either. “I’m a good investor, lousy trader,” he wrote back, “so I asked my trader.” She came up with the following: If you’re an institutional investor hooked into it, you can trade on Instinet — an electronic trading system where institutions can make bids, show offers and execute trades over the computer. This trading lasts 24 hrs, technically with a shutdown between 7 and 7:30 p.m. There is also a blind crossing session around 6:30 or 7 p.m. where buys and sells are matched up and trade at NYSE or ASE last sale price (OTC stocks trade at midpoint of the market). There is also a matching session for the Arizona Stock Exchange (which I think is a computer in New Jersey, although they may have moved it) at 5 and 5:30 p.m., same pricing rules as above — can enter orders after 4 p.m. and orders can be entered on an open book (people can see your bid or offer) or on the closed book. Third-market trading (through Jeffries & Co., etc.) can take place 24 hrs a day, but you can no longer trade when there is a NASDAQ or NYSE halt on a stock due to news pending. (As you can imagine, it used to be like the Wild West over at Jeffries before news announcements.) The NYSE has a crossing session at 5 p.m. where stock is crossed at the NYSE closing price. Enter orders between 4:15 p.m. and 5 p.m. There is also some other weird crossing thing at the NYSE at 5:15 p.m. which involves baskets of at least 15 stocks. There are ways to trade overseas, too — in London, etc. If you feel left out of the action, you may be trying too hard. Take the weekend off. And when you get back: finally, the cheesecake. Tuesday: Yes! Fat-Free, Sugar-Free Cheesecake
A Load, But Low Expenses August 28, 1997March 25, 2012 From Steve Baker: "Funds that charge front-end loads often have lower annual expense charges than no-load funds. How long would someone have to hold a front-loaded fund for the difference to be worthwhile, all other factors being equal?" First off, why not get a fund with no load AND a low expense ratio? That’s what I’d recommend. Other than that, it’s simple math (which I will shortly complicate), and the same really as asking: "How long would someone have to live in a house to make it worthwhile to take a mortgage with higher upfront ‘points’ but a lower annual interest rate?" Let’s assume we’re talking about a low-load fund with a 3% sales fee but half a percent lower annual expenses. Or a mortgage that charges 3 points upfront — 3% — but that bears a 0.5% lower interest charge than the no-points mortgage you’re comparing it with. The answer your child should be applauded for giving you is: 6 years. That’s the breakeven. (If your child is destined to become a lawyer, or do well on her SATs, she should answer "more than 6 years," to match the wording of the question.) You pay $3,000 extra on a $100,000 investment (or mortgage), but you save $500 a year, or $3,000 after six years. (If your child is destined to become a tax lawyer, she might point out that mortgage points are not always immediately deductible where mortgage interest almost always is, which skews the comparison. Looking at it on an after-tax basis, which is the only way that makes sense, you’d have to do more math if the points were not immediately deductible as well.) But what if your child isn’t 11, as we seem to be assuming here, but 24 and just out of Wharton? Far from being applauded for a dumb answer like "more than 6 years" — yes, we know 3 divided by .5 is 6, but that’s not why we spent $50,000 sending you to Wharton — he should be sent to the toolshed, or out behind the woodpile, or wherever it is dumb MBAs in colonial days used to be sent for a thrashing. Because the true answer rests on the discount rate you assign to the time value of money. If none, then a 3% load is indeed neutralized in 6 years by a fund with .5% lower expense ratio. But of course money DOES have a time value. A dollar today IS worth more than the promise of a dollar a year from now. A bird in the hand IS worth two in the bush. (Three, if it’s a distant bush or the kind whose thorns rend your garment when you go bird-hunting in it.) So, leaving aside the fact that you might not want to be locked into this fund that long in order to start reaping the benefits of a lower expense ratio, which is another reason to be skeptical of loads, there is also the fact that the .5% you save in Year 6 is not really worth nearly as much as it would be today, assuming you can make your money grow somehow over six years. And that’s also true, to a lesser extent, of the .5% you save in Year 5, in Year 4, in Year 3, in Year 2 and, yes, even in Year 1 (since the load is paid up front, but the benefit of the lower expense ratio is spread out over the year). There’s a lot to be said about what discount rate to choose in doing a calculation. It’s not a number you’ll find printed in the Wall Street Journal each day (and it’s not to be confused with the famous Discount Rate charged banks by the Federal Reserve). Maybe one day, when there’s a truly personal Internet version of the Journal, there will be a listing for your own, personal discount rate, based on all sorts of confidential personal financial data anyone, and certainly the Journal, will by then be able to pull up on you. But not now. You have to pick one for yourself. If you currently are paying 18% on a credit card balance, an appropriate discount rate for you to choose for many decisions might actually be that high — 18% — because that’s what you could earn, tax-free and risk-free, on a little extra money. To you, $118 in a year is worth $100 today. You could pay Visa either $100 now or $118 a year from now. Either way works out the same: you’d be $100 less in debt. Anyhow, back to the issue at hand: With a 10% discount rate (which is still high), .5% in 6 years is the same as about .27% today. (To check me, multiply .5 by 90% six times. Or do it with $50 instead. Each year, if it loses 10% of its value, it’s worth only 90% as much as the year before — $27 after 6 years.) So using these assumptions, my financial calculator tells me it would take almost 10 years for the 3% load to be "neutralized" by a .5% lower expense rate. (This requires more multiplications than you would want to do by hand, or even with a regular calculator, because it’s different for each of the six years.) If you used a 5% discount rate, a little under 8 years. If you were crazy enough to think the two hypothetical funds you were comparing could earn 15% a year, and thus used 15% as your discount rate — 17 years. If you actually do owe $17,000 on your credit cards and pay 18% on the balance, and were thinking of borrowing yet $10,000 more at that rate to make this investment, then it would never make sense to buy the load fund. You would never catch up from your savings on the annual expenses. But like I say, none of this is necessary. Buy a no-load fund with a low expense ratio and nobody has to go to Wharton, which saves another $50,000. Cheesecake Lovers: Hang On!
D.I.N.K. August 27, 1997February 3, 2017 Writes Terry: “I read your comments regards to paying off mortgages and wanted your opinion on my own situation. I am 44 yr old D.I.N.K., with no debt other than an 80k mortgage at 8.5% with 20 yrs left. Spouse earns about 40k (she is 30), my earnings (sales) are very inconsistant [sic] but minimum is likely to be 40-50k/yr. We live conservatively and can easily afford to add an additional $500./mth (towards principal) to our house payment of $855/mth. Our savings are modest, about 50k total. “The question of course is, should we continue to pay down the mortgage or would it be better to put that $500/mth into savings? I hate debt and without a house payment we could live on about 12k/yr. I will appreciate your insights. Thank you and please don’t use my name or email address.” A D.I.N.K., I should first translate for the acronym-differently-abled, is no longer the pejorative it once was on the paddle tennis courts of Camp Wigwam and has nothing to do with Donna Karan. Double Income No Kids. I think your question answers itself, Terry. You hate debt and can easily afford to keep paying down your mortgage. So keep it up! By so doing, you get a well-deserved sense of satisfaction and you in effect earn a risk-free 8.5% — not stellar, to be sure, but not at all bad, either. I assume you itemize your deductions, so it’s in effect a “pre-tax” 8.5% you’re earning (in that after tax, this interest is only costing you maybe 5.75%, meaning that not having to pay it is like earning only 5.75%). But still, not bad at all. Of course, the math would tell you that if you can just find a stock growing at 10%, let alone 20% or 30%, a year, you would do better putting your $500 chunks there. True. But Polaroid was once such a growth stock — brilliant scientists nestled between two of the greatest universities in the world, a monopoly on an amazing product. You could have bought it for $144 in 1972, if memory serves, and then, two or three years later, $14. So there’s something to be said for a certain level of guaranteed saving, and this mortgage pay-down scheme of yours fits it nicely. Tomorrow: A Load, But Low Expenses (Cheesecake Lovers: Hang On)
Fortune Cookies August 26, 1997February 3, 2017 “Yesterday, you ran a one-word comment. Usually you go on way too long, but now this? One word?” When this column was first conceived, Ceres simply said it wanted a “daily comment.” Any specific length? I asked. No, as long or as short as you want. Every day? I asked. Well, every day the market’s open. About investing? I asked. About anything you want. I really had no idea how this would turn out. “The market was generally strong today, with tornado watches in effect for several Internet stocks, and scattered showers over packaged goods.” A daily comment? Like, “Neither a borrower nor a lender be”? Do you know how long it took Shakespeare to write that? (And of course he was referring to personal loans only, I realized after about twenty years — it’s fine to lend to Uncle Sam by buying Treasury bonds, or borrow against your life insurance policy to help fund tuition.) I had no idea what to expect (or how much fun it would be, thanks to your feedback). I thought maybe I’d signed on, when you called a spade a spade, to write fortune cookies. “You will be getting small dividend soon. Go on happy journey.” And it is this topic — fortune cookies — I would like briefly to address. You eat Chinese from time to time, yes? Well, Confucius say: “When fortune cookie come, and people begin read out loud, require everyone append phrase “between the sheets.” Wok every time. Try it. My apologies to those of you who have been using this technique for years. I dazzled one of the founders of modern finance and his wife with this after a fine Chinese dinner one night not long ago, and he said, “Oh, yes. We used to do that during the war.” Tomorrow: Advice to a D.I.N.K.
Hocking the House to Buy Stocks August 25, 1997February 3, 2017 From Ultraed over at AOL.com: “Do you think it is a good idea to take an equity line on my house for 10% and invest some of the money in the stock market?” No.
The Engineer Meets The Car Loan Calculation August 22, 1997March 25, 2012 "I’ve read a bunch of books on personal finance," writes Charles, "but I’m left with a question I can’t answer, although I suspect it should be obvious. Probably, the engineer in me just wants a specific answer instead of the ‘feel-good’ answer. Which is better, borrowing $20,000 for a new car, or paying cash and investing the equivalent of the monthly payments? What I call the ‘feel-good’ answer is: ‘Of course, borrowing is bad, investing is good.’ But, how good? I need some tools to figure out when this makes sense and when it doesn’t. Or is it really so obvious that it ALWAYS makes sense? "The situation I find myself in is that, for the first time in my life, I can afford to pay cash for a new car. But that cash represents 10% of my (non 401k) investment assets. Where earlier I only thought of the monthly payments, which didn’t bother me, I now find it EXTREMELY difficult to part with that much cold hard cash. [You could always buy a nice used car for $6,000, Charles.] "My wife came up with the idea of repaying ourselves the money in monthly installments, as if we were paying off a car loan. But the engineer in me says, ‘how much do we have to pay ourselves to make this a better deal than borrowing?’ Presumably, less than the loan payments would be, but how much less?" Charles was beginning to lose me with this, and I will spare you the several paragraphs that followed with all kinds of engineering schematics, as it were, trying to get at the right answer. But of course the right answer is very, very simple (never mind the fact that I can’t even light my grill, let alone engineer a chemical plant). Not having to PAY 10% (or whatever) on a car loan is precisely the same as earning 10% (or whatever) risk-free, tax-free. (It’s tax-free because, except to a business, the interest on car loans isn’t deductible.) I know of no other investment that comes close to that, so buy the car for cash. This has the added benefit of reminding you what you’re really paying for the car — not $400 a month, but TWENTY THOUSAND DOLLARS! Which might actually help you focus on your priorities. Maybe, seen that way, you really would prefer — voluntarily, not because I nagged you — a $6,000 used car, putting the $14,000 difference to work someplace else. That way, you save the better part of $14,000 and all the interest you would have paid on the car loan (and something on insurance, because you might decide to skip collision and comprehensive). If the financing were 3% instead of 10%, then it would be different — except it wouldn’t, because they’d be offering you your choice of 3% financing or "$2,000 cash back," or whatever — so it’s not really 3%, it’s whatever car-loan lenders lend money at these days. Sure, if you’re starting a business and need a nice car to impress clients and are short on capital, you’d finance the car — in fact, you’d lease it. The payments would be deductible, and while it’s hardly risk-free, your "return" on the $20,000 in start-up capital freed up by leasing could be 100% or 1000% or 10,000% if your business succeeds. But to borrow $20,000 at 10% in order to keep it in a savings account at 5% (which is to say 3.5% after tax)? Or to put it into the market and maybe lose a chunk of it if the market turns down, or earn 10% pre-tax on it? I’d pay cash and consider "Not-Taking-Out-This-Loan" (symbol: NTOTL) one of your core holdings. Incidentally, to figure out which car to buy, if it’s definitely going to be a new one, check out www.personalogic.com.
Keeping Up with the Super Joneses August 21, 1997February 3, 2017 Mike writes: “I’ve moved to Cambridge, MA (quite a change from the Waco, TX I’m used to) so that my wife may attend Harvard Law School. Which brings me to the reason of my writing — what is one to do when everyone around them is fabulously wealthy? [Quick answer: Enjoy it; send thank-you notes.] “I’ve got a typical consulting job, but all of my friends (and probably my wife) will in a few short years be making gobs of money (one is already making six figures and none are yet 25). I never intended on being wealthy or hanging out with the elites, but I’ve found that it just happens if you’ve got smart friends and get a decent education. Is that okay? Or should I attempt to stave it off? [Quick answer: Why would you want to stave off being wealthy or hanging around with elite people? Snobby people, yes. But lots of elite people are anything but snobby. If Steven Spielberg ever invites me up for coffee, I’ll bound up the stairs.] “I’m not resentful of them. I’ll probably join them if not from my own work, from my wife’s. But I’m not sure how to cope with this change. I always intended on being a starving academic but got disenchanted with academia and then married. “I know you must have grappled with ‘how to keep up with the Jones’s when their making $500K a year’ and perhaps more significantly whether there is an absolute, maximum standard of living that one should have. I gladly welcome any comments you have, and, hey, you know any good places to get Mexican food in Boston?” # Mike: Sounds as if you’re a perfect candidate for “living beneath your means,” which I’ve always strongly advocated. For you, it should be entirely painless. And you will be able to secretly smile, watching at least some of your fabulously gobby friends spending a ton of money and taking on fabulous mortgages while you and your wife are saving. By all means hang out with them. Enjoy their good company and fine hors d’oevres. Reciprocate with your good company and fat-free onion dip. Enjoy going out on their boats. If I may quote from my own forthcoming book (the subtle beginning of what will in the coming weeks be a subtle campaign of shameless plugs for that book, called MY VAST FORTUNE: The Money Adventures of a Quixotic Capitalist, Random House, October, and available at 30% off right now at www.amazon.com): “Boats? The dumbest thing you can possibly do is buy a boat. For one hundredth the money and one thousandth the hassle, you can lavish a boat-owning pal with so many gifts he wouldn’t dream of leaving port without you.” Make it your plan relatively quickly to accumulate impressive financial security. If your lifestyle is modest, you get a double boost: first, from being able to save more; second, from needing to accumulate less. (Do you know how much capital you need to amass to support a yachtsman’s lifestyle? Fugeddabowdit!) Don’t remotely try to keep up with these Joneses in terms of spending — why should you? You think Malcolm Forbes invited Fran Lebowitz on his yacht all the time because she was rich? Take your friends out for funky Mexican food. Better still, have them over and serve them chili. One of the most successful hostesses I know in New York almost always serves her famous San Antonio chili. Surely they had chili in Waco, too? I’ve met everyone from Peter Jennings to Barbara Walters at her place, and each time what we get is: chili. Who cares? (And it’s actually very good chili.) As for whether there’s “an absolute maximum standard of living that one should have,” surprisingly, there is: mine.
The Problem With Michigan August 20, 1997February 3, 2017 Yesterday, I explained how Michigan drivers get such a better deal on the “people” portions of auto insurance than basically everyone else in the country. They may not all think so, because it’s hard to know what sort of deal you have until you’re really hurt or you accidentally hurt someone else. But that’s where the Michigan system shines. (And isn’t that what the people portion of auto insurance is supposed to be all about?) Michigan drivers get virtually unlimited reimbursement for medical and rehabilitation costs, as well as decent wage-loss coverage, and for a significantly lower premium than drivers in most others states pay for far less protection. In California, for example, drivers pay more money to get just $15,000 of coverage — which is particularly galling when you consider that it is not even $15,000 that covers them, only whomever they happen to hit, and that this $15,000 is then often reduced by legal fees. (Of course, Californians can buy much more coverage if they want. But millions of others, unable to afford even the legal minimal coverage, buy none at all.) So why don’t all states just follow Michigan’s lead? The short answer, as you’ve heard, is the lawyers. Our misery is their income, and — while they surely wish us no harm — they don’t want to give up that income. Nationwide, it amounts to many billions of dollars a year, and there’s no way they’re going to give it up, any more than tobacco executives were going to admit, decade after decade, that cigarette smoking caused lung cancer. But what if, for the sake of argument, the lawyers rolled over and let us have whatever auto insurance system we wanted? Would Michigan be perfect? No. Pretty close (and vastly better than what we have now, so I’d grab it in a minute, if offered), but not perfect. Here’s why: Poor Michigan Town Struggles With Funerals for 11 Crash Victims As reported in the New York Times August 4, two mothers and 11 children were riding in a pickup truck July 29, coming back from a hot summer afternoon of swimming. One of the moms, Mrs. Jackson, driving with a suspended license, ran a stop sign. A dump truck rammed into her pickup. The two moms and eight of the kids died instantly, a ninth at the hospital. As of the date of the Times story, the two remaining toddlers were hospitalized in critical condition. Michigan auto insurance would be terrific if these people had been able to afford to buy it. But as relatively inexpensive as it is, especially given its terrific benefits, not everyone can afford it. “And so in Albion,” reported the Times, “coffee cans and cottage cheese tubs have been turned into collection baskets, the Kmart has donated funeral clothes for the victims, and on Saturday, the Fraternal Order of Eagles lodge drew almost 400 people for a $3-a-plate spaghetti dinner.” Yes, under Michigan no-fault, survivors and relatives of a horrendous crash like this do retain the right to sue. That’s actually one feature of the Michigan system that adds to its cost. But there are two problems with suing the dump truck driver. First, it wasn’t his fault, so they’d lose. Second, he was poor, too, so even if they won, there’d be nothing to get. (“[T]he dump truck driver,” reports the Times, “… has a good driving record, is a volunteer firefighter who always worked and never caroused, friends said, and stayed at the crash site for hours helping to find the bodies of the children. He is so devastated he can barely talk about the accident, friends said, though he has paid visits to at least one of the victims’ families.” Well, you hear the lawyers wondering, can’t we sue him for something? Or sue his wife?) So what’s the answer? How do you make insurance coverage less expensive, so more poor people can afford it? One way is to allow them to opt out of the pain-and-suffering-lawsuit portion of it. In Michigan, those suits are limited to only the most severe accidents, but allowing low income people to opt out would still save some money. Better to have unlimited medical and rehab reimbursement, plus good wage-loss coverage, than nothing. Another way is to offer low-income people the option to buy a smaller, but still meaningful, benefit. Perhaps a policy with a $50,000-per-person cap, and modest death benefits for tragic cases like this one. Clearly not as good — but less expensive and, again, much better than nothing. Yet another way: some sort of subsidy. You could, for example, cover all children under 18 automatically, by law, passing the cost of these cases on to everyone else. Personally, I’d be for that. And the mechanics are easy. (The state would set up an “assigned claims” plan, under which uninsured injured kids got assigned to insurers randomly, in proportion to the amount of business insurers wrote in the state. Insurers would increase their rates accordingly.) But when you talk subsidy, even of injured children, you enter the realm of political philosophy more than economics. In today’s climate, particularly, the “perfect” auto insurance system may be Michigan’s, with one twist: low-income people would have the option of buying a less generous, less expensive policy, but one they could more likely afford. The sorrow in Albion would have been no less. But financially, at least, things wouldn’t have been quite so bleak. As usual, if you care about this, spread the word. It may seem hopeless — it may BE hopeless. But this is America, and in America, anything is possible. Even real auto insurance reform. Tomorrow: Keeping Up with the Super Joneses
Pay Less, Get More August 19, 1997February 3, 2017 In Michigan, the one state with a real no-fault auto insurance system, in place since 1973, people pay less for the “people” portions of the coverage than residents of many other states, yet they are far better protected — with unlimited medical benefits and rehab, plus significant wage-loss coverage — than anywhere else in the country. So why wouldn’t all the other states flock to adopt a system like the one in Michigan? Because the lawyers, faced with billions of dollars in lost fees, do whatever it takes to keep the rest of us from having it. That is old news, as regular readers of this column know all too well. (Sorry!) But there’s a bit of new news, which I’ll get to in a minute. There are two ways of looking at auto insurance reform. One is just with common sense. If more than half the money people pay for the “people” portion of auto insurance goes to lawyers and fraud in some states, then a no-lawsuit system that inspired no routine fraud (there will always be a little organized criminal fraud) would obviously deliver consumers and crash victims more bang for the buck. Or look at it this way. Could adding a lawyer to every health insurance claim possibly make health insurance a better deal? Could offering a cash prize to compensate for the pain and suffering of an illness possibly fail to encourage some people to exaggerate or invent their pain and suffering — or even, in some cases, to get sick on purpose? That’s what happens now. In California, three-and-a-half times as many people claim whiplash after an accident as in Michigan, where there’s no cash incentive to do so. And sometimes, people actually cause accidents on purpose to be able to sue. To me, common sense — and the quarter-century experience in Michigan — should be enough. But it obviously hasn’t been enough, so any number of good people have tried over the years to analyze the data in more sophisticated ways. The most recent example of this is a clever piece of work just done by Robert Hunter, who is sort of the dean of insurance-industry critics in America, the former federal insurance administrator under Ford and Carter, former Texas insurance commissioner (boy were the insurance companies happy to get rid of him), an actuary, and currently head of the insurance arm of the Consumer Federation of America. He made a little list of all the states, with one column showing what kind of auto insurance system it had — 27 traditional lawsuit states, 14 so-called no-fault states, the rest hybrids — and then other columns showing how they ranked for cost. Of course, most of the states that think they’re no-fault aren’t really, in any meaningful way. Indeed, they’re the worst of all possible worlds, because not only do they still have tons of lawsuits and tons of incentive to invent or exaggerate pain and suffering — they actually increase the incentive, with hurdles you have to meet in order to be able to sue. Example: in Massachusetts, from 1971 to 1987 or so, you had to have $500 in medical bills in order to be able to sue. (So everyone just went out and racked up that much in medical bills.) Then in 1988 the threshold was raised to what was meant to be a more meaningful $2,000. Over the next year, the average number of medical visits following an auto accident jumped from 13 to 30. So whatever the statistical tests you devise, you’d expect Michigan to fare well, and the other so-called “no-fault” states to fare badly. Which is as it happens exactly what Hunter, being an honest guy in no one’s pocket — least of all the insurance industry’s pocket — found. His report concluded: Real no-fault, Michigan, succeeds under these tests. Ranked 3rd most expensive in the nation in collision prices, Michigan’s cost for “liability” [the damage-to-people portion] is only 32nd. And Michigan gives victims the remarkable unlimited no-fault medical and rehabilitation benefits! For the five-year price-change test, Michigan’s collision rank was 16th [in the rate at which premiums rose] but only 42nd for liability [the damage-to-people portion]. Good no fault works! Bad no-fault does not. Michigan’s benefits are so much higher than in other states you could understand how it might be expensive. But it’s not. You could understand how it might be vastly more costly than in the 27 traditional lawsuit states, like California. But it’s not. In California, if you’re really badly hurt — $100,000 or more in actual economic damages — you recoup just 9% of your losses from the auto insurance system. In Michigan, it’s much closer to 100%. Yet coverage cost less in Michigan than in most states and significantly less than in California. Why? Because most of the bodily-injury premium that is collected isn’t going to lawyers and fraud, it’s going to people with bodily injuries. Now there’s a novel concept. Tomorrow: The Problem With Michigan
Time to Get Out? August 18, 1997February 3, 2017 “Up until now,” one of you wrote me almost a year ago, “you appear to have leaned toward index funds and to avoid market timing. Now, you are alluding to a high market. Are you suggesting it is time to pull out?” “If you’re a market timer,” I wrote back, “it might be time to pull back, if not out — but study after study shows the folly of being a market timer . . . especially if you’re a market timer in a taxable account.” Well, my advice stands (well, shifts a little, but largely stands): Don’t be in this market on margin. (And if you pay interest on credit cards or car loans, you’re in effect borrowing at an even-higher-than-margin-loan rate to be in this market.) If you’re lucky enough to have money in a tax-sheltered account, lighten up on the stocks. “But you’ve been saying that for so long, no one would have anything left to lighten up,” a friend of mine ribs me. But that’s not entirely true. Say you had a retirement plan that had grown over the last few years to $150,000 in stocks when I started saying this. You shifted $30,000 worth off onto the sidelines in some safe, liquid interest-bearing investment. Then the market went up some more and you had $150,000 again. Here came my stupid advice again, and you shifted another $30,000 off onto the sidelines, or to Russia or someplace. (The Templeton Russia Fund has about quadrupled since I started writing this column a year and a half ago.) Then . . . well, you get the point. One day, people with ready money on the sidelines, earning tax-deferred interest, are going to be envied and are going to have an opportunity to put that money to good use. Of course, the way things look today, that day might not come for 100 years. But it usually comes sooner. With taxable money, it’s much harder to bite the bullet and sell highly appreciated securities, especially if you have a high income and live in a high-tax state. There are many approaches to this problem. One is to try to find stocks in your portfolio in which, miraculously, you have little or no gain, not because they are unrecognized gems (hang on!) but because, well, things didn’t work out as you expected (or maybe you just bought recently at today’s high prices). Sell those for a minor gain or loss, with no appreciable tax consequences, and use that money to build your resources on the sidelines. Let me conclude with this: There are perfectly sensible reasons to remain 100% in stocks even today (though why 100% U.S.?), especially if you’re young and you have developed the magnificent habit of simply investing a slice of your pay in the market every month. But these two are NOT among those perfectly sensible reasons: (1) “Why should I earn 5% interest on the sidelines when I can earn 15% or 30% a year in the market?” (2) “I have to stay in the market — it’s simple math: at 5% on the sidelines, I won’t accumulate the sum I need.” They are, rather, famous-last-words reasons.