Clever Headline TK March 14, 2002February 21, 2017 That’s an abbreviation writers and editors use: TK. It stands for ‘to kome’ – not because we can’t spell, but because by misspelling it in this way, we assure that it won’t accidentally make it into print. The copy editor (or, now, the spell checker) will surely spy it and yell across the room, ‘Hey Harry – we still have some TK’s in the platypus piece!’ Unfortunately, Harry and I were not able to come up with a clever title before the presses started rolling. So harried have we been, indeed, we nearly forgot to feed the platypus. FROM THE BERKSHIRE-HATHAWAY ANNUAL REPORT “In neither the purchase of goods nor the hiring of personnel, do we ever consider the religious views, the gender, the race or the sexual orientation of the persons we are dealing with. It would not only be wrong to do so, it would be idiotic. We need all of the talent we can find, and we have learned that able and trustworthy managers, employees and suppliers come from a very wide spectrum of humanity.” – Warren Buffett ROTH RAMIFICATIONS David Maymudes: ‘I haven’t heard much discussion of it, but isn’t the Roth IRA an obvious case of shifting tax revenues from the future to the present, so that we can claim we’re balancing budgets?’ ☞ Yes – and the worst part about it is that we’re NOT balancing budgets – we choose to blow the surplus by cutting taxes on those already best off. The only justification, or partial justification, for making Roth IRA withdrawals tax-free is that it may encourage a higher savings rate, and thus enrich us all. But be fiscal policy as it may, from the point of view of one’s own personal finances, a Roth IRA is likely to be a very good choice. BALTIMORE – OR LESS? Ed Pariser: ‘Smug accounting of the Arab world’s finances by Baltimore Jewish Times publisher Andrew Buerger doesn’t remove the reality of what we are constantly told is ‘the only democracy in the Middle East’ treating its neighbors as sub-humans. As an American Jew, I was one of millions who supported the operations Buerger recites that brought oppressed Jews to freedom. When we were supporting those operations with our dollars and our volunteers, we believed Israel to be a model of fairness, freedom, and civilization. Under Sharon’s regime, we find the current Israel to be arrogant, aggressive, and antagonistic toward their neighbors (who have been in limbo for 35 years). Sharon is now finally culminating his plan to destroy the Palestinian leadership that he began with his provoking visit to the Temple Mount two years ago. I hope that American Jews and fair-minded Israelis (like those servicemen who were recently unwilling to participate in the further destruction of the West Bank) will thwart Sharon’s goal of bringing down the land-for-peace process by denying him any future funds and manpower.’ ☞ Maybe so; but Arafat acted with tragic cowardice in not accepting – or at least accepting as a very good base for further negotiation – Barak’s offer to give back 97% of the land Arafat sought. It was Arafat who, thus, assured Sharon’s election. Wouldn’t it be great if – its always being darkest before the dawn – the current nightmare now led the Saudis and others to apply real pressure and incentives for peace? SIX MONTHS LATER I am more than a little surprised that the market is higher today than it was September 10. I sure didn’t see that coming. In the wake of the six-month anniversary, I looked back to the September 18 column to see how my five stocks had fared: Then Now AMR 18 27.5 +52% BA 36 49 +36% JNPR 12 13 + 8% HMC 18.5 21 +13% UAL 18 16.5 – 8% I think the market is even less of a bargain here than it was September 10, and certainly less of a bargain than on September 18, but the market has a way of scoffing at me. I’ve sold my AMR, BA and UAL, and hold the other two – but only because I can afford to play around at this. Periodic investments in index funds, buying and holding, make more sense.
Another Roth Plus and an Open Letter (Not Mine) to Crown Prince Abdullah March 13, 2002February 21, 2017 ANOTHER PLUS FOR THE ROTH IRA Fred Jaggi: ‘Because small increments of income cause large amounts of Social Security benefits to be taxed, many seniors find that the effective marginal rate of tax is much higher once they are retired than when they were working. The marginal rate can be as high as 52% for ordinary income, including withdrawal from an IRA, 44% for long-term capital gains, and 24% for ‘tax-free’ bonds! Click here and here to see how that works. Tax-free withdrawals from a Roth do not trigger an increase in amount of Social Security taxed.’ A POSSIBLE MINUS Jonathan Edwards: ‘I have argued ever since the Roth IRA was created that Congress will eventually have to repeal this feature. Come 2037 when the Social Security Trust Fund runs out of money, I can’t imagine that the working-age public will let Congress continue to allow baby boom retirees to pay no taxes whatsoever on their incomes, no matter how large.’ ☞ Well, there are going to be a LOT of seniors voting in the 2038 mid-term elections, so I’m not certain you are right. AN OPEN LETTER TO CROWN PRINCE ABDULLAH BIN ABDUL AZIZ AL-SAUD From: The publisher of the Baltimore Jewish Times, Andrew Buerger February 1, 2002 Dear Crown Prince: After reading the excerpts from your recent New York Times interview, I have to applaud your efforts to aid your ‘oppressed’ Palestinian brethren. It’s very sad to see those poor children being subjected to violence and poverty. And, I encourage you to continue to challenge President George W. Bush, as I often do in my column in the Baltimore Jewish Times. In the interview, you expressed concern that Mr. Bush wasn’t doing enough to help your Palestinians, your fellow Muslim Arabs. I wanted to drop you a line to suggest ways to help them. After all, my people have some experience in this area. You probably read that Jews, too, were in refugee camps after World War Two, and we got very little help from governments around the world. Diaspora Jews lined up to donate millions of dollars to help resettle them in safe countries. In addition to money, thousands of volunteers worked tirelessly for years to get the Jews out of danger. This was before our people had a homeland. If you have time with your work schedule, I suggest you read Exodus by Baltimore-native Leon Uris. Recently, Jews lived in threatening places like Ethiopia and the former Soviet Union, let alone Syria and Yemen. We raised millions of dollars, not from the US Government, but from our own people, and used incredible organizational skill to get them to Israel and the US. In the last 50 years, we’ve been fortunate to have a homeland, but before that we placed Jews in Argentina, Canada and the United states, anywhere so we wouldn’t be “oppressed.” Our people, didn’t rest until every Jew was out of harm’s way. Former JDC president, Jonathan Kolker, recently said that for the first time in 2,000 years all Jews can leave their country if they choose. It took tremendous work and billions of dollars to reach that goal. I don’t know much about your finances, but you might be able to tap money from your oil revenue. I’ve seen some of your palaces on TV, which look pretty nice. I thought maybe you could use one of them to house 1,000 Palestinian children just as countless Jewish families took in refugees during the Holocaust. I know that Saudi Arabia isn’t a Palestinian State, but it’s home to some pretty important places such as Mecca and Medina. Perhaps I could recommend the help of Jewish Federations to review your budget and find funds. They have some of the best ratios around when it comes to percentage of donated money going to charitable causes. To put the Former Soviet Union emigration in perspective, it would be as if the US were to absorb every French citizen. And the Jewish people are a fraction of the Muslim population. Also search the web for information about Operation Moses and Operation Solomon from 1986 and 1991, respectively, to see the amazing story of how world Jewry brought endangered Ethiopian Jews to Israel. With all due respect, Crown Prince, why haven’t you done more to help your people? Blaming the US and Israel just won’t work. At an Arab nation summit, you and your colleagues pledged $1 billion for Yasser Arafat’s Palestinian Authority. You never delivered it because of fears of corruption. That was probably wise. But if you’re concerned about their well-being, you should take the Palestinians out of harm’s way. When things calm down, I’m sure the US and Israel would sit down with their leaders — as they keep trying to do—to create a Palestinian homeland. It would be great, too, if you could talk to your colleagues in Jordan, which is mostly Palestinian, to help out here. To help your people, I suggest your remind them that Islamic law prohibits murder. I respectfully suggest that you become part of the solution, and not just another complainer. After all, it’s worked for the Jews.
The Three-Account Strategy; Funds-of-Funds; Tivo March 12, 2002January 25, 2017 MORE ON SHARING Chip E.: ‘You are right when you say there are many ways to share expenses when a couple has unequal incomes. My partner and I have found it useful to have three bank accounts (his, mine and ours). This has several benefits. First, the wealthier partner protects his assets – often not just a real need but also a psychological need. Second, each partner has his own money to use as he/she wishes without the other knowing and therefore having to ‘approve’ (whether explicitly or tacitly). This is a relationship between two adults. Neither should feel the need to be the parent or be treated as a child. ‘That said, we have split the amount we contribute to the joint account in different ways over the years. At first, the joint account was used just for true household expenses (not including the mortgage and real estate taxes on the house which is in my name). My lower-earning partner in the early years insisted on putting the same amount in the account each month as I did. As the relationship matured (we are now together over 11 years), the amount going in and the use of the joint account expanded. We now each put in 33% of our take-home pay. This allows us to use the account not only for household expenses but also for vacations, our restaurant meals, furniture purchases and other miscellaneous expenses. We each feel that we are contributing according to our ability (sounds socialist coming from a Republican). As my remaining 67% is significantly higher than his, I use it not only for my personal expenses, but also to make my automatic monthly Vanguard index fund contribution and to annually fund his Roth IRA. Between his 403(b) maximum contribution and his Roth IRA, he is putting away significantly more than he would have on his own and will have a substantial sum after we retire many years from now. The important thing is that this is his money and that he won’t be totally dependent on me at that stage in our lives. This is what we do. As I said before, there is no one right answer.’ FOREIGN FUNDS FINE POINT Robert: ‘Re your March 5 column, one point on the foreign stock funds that needs mentioning. Funds-of-funds (like Vanguard’s Total International Index, which is a fund made up of three other mutual funds) do not pass foreign tax credits through to the shareholder. Just wanted to point this out. I learned the hard way.’ ☞ You’re right! With respect to Vanguard, that disadvantage applies only to Vanguard’s Total International Index fund. It can be avoided by purchasing the Vanguard Pacific, Vanguard European, and Vanguard Emerging Market Index Funds in roughly the proportions they are held by Vanguard’s Total International Index Fund (currently around 24%, 68%, and 8%, respectively). Thanks for pointing this out. TIVO – CAREFUL WHAT I WISH FOR Chris Hubbard: ‘If your vision of the television future comes true, and people can skip commercials at will, won’t that mean that we will see Tom Brokaw talking about how poor Timmy fell down the well and needed Band-Aid brand bandages for all the cuts and scrapes? I.e., even more product placement in the TV shows?’ ☞ Very possibly. And, in the same vein . . . Bill Walker: ‘I see a major problem with EVERY television coming equipped with the built in capability of allowing viewers to skip the commercials. Commercials are the reason for the existence of all those show we want to watch. The commercials pay for the shows. If no one is watching the commercials, then businesses won’t pay to advertise and the viewers will end up footing the entire bill to produce the shows. I can’t even imagine what the cost per household would be, but I do know that the cast of ER will not be able to count on me to pay their exorbitant salaries.’ ☞ It is a thorny but, I think, surmountable problem. If each episode of ER costs $2 million to produce and is watched by 20 million, that’s just a dime each. I think we’ll find a way to let viewers pay more to watch without commercials, if they choose to. Tomorrow: Another Plus for the Roth IRA, and an Open Letter (Not Mine) to Crown Prince Abdullah
When To Use Limit Orders March 11, 2002February 21, 2017 UNEQUAL INCOMES Eric M: ‘I make $36,075 per year as a program coordinator at a local community college. My better half, a full professor, endowed chair and about to be an associate dean, makes $172,000. He and I are both debt-free except for the mortgage and monthly expenses. What is an equitable division of monthly bill-paying for us?’ ☞ Professors make $172,000? Cool! He must be awfully good. The answer is, of course: I don’t know. There are a lot of ways to do this. But it seems to me that, for your part, you should insist on contributing as much it would cost you if you were roughing it on your own – and that, for his part, he should be impressed by your responsibility and graciously accept. If he then wants to help you in other ways, buying you the occasional car, or helping you to fund your Roth IRA each year, all the better. But if I were you, I’d rather have him feel you’re trying too hard than not trying hard enough. DON’T WRITE A BLANK CHECK Stephen Powell: ‘Do you have any rules of thumb about when to use limit orders vs. market orders when buying and selling stocks?’ ☞ I almost always use limit orders. The deep discounter I use charges just $5 more – $13 a trade, of any size, instead of $8. The only time I don’t is when I’m trading just a few shares of a VERY liquid stock. Even then you might have a reason to use limits, but at least you won’t get taken advantage of by a market-maker if there’s a tiny spread between the bid and asked prices, as is the case with highly liquid stocks. To take two extremes: If I wanted to buy 500 shares of Microsoft, I probably would just buy it. ‘At the market.’ But if I wanted to buy 100,000 shares of some 40-cent bankruptcy speculation, I would unquestionably pay the whopping $13 commission for a limit order instead of the $8 commission for a market order. The extra $5 could easily save me $2,000 or $3,000, maybe more. Just where to draw the line between those two extremes? When in even the slightest doubt, use a limit order. The other reason to use them is that stock prices fluctuate. If you’re not desperate to buy this particular stock immediately, it could certainly dip back to the bottom of the day’s trading range (say) and you might save 50 cents on 500 shares = $250. And if you are desperate to buy it immediately . . . well, that alone is often a good reason to reconsider. Then again, in trying to chisel for 50 cents a share by placing a limit order ‘under the market,’ if you’re buying (or ‘above the market,’ if you’re selling), you could watch the stock just move steadily away from you and never make the trade at all. You put in a $21.30 limit order when the stock was $21.50 and became increasingly loath to pay $22 – now $22.75 – now $23 – now $24.50 – when, if you had just put in a market order, you would have gotten it at 21.50 or $21.75. Sometimes I do use limit orders this way, hoping to buy a little below (or sell a little above) the current market. More often, I use them just to be sure that I don’t get blind-sided by a sudden move or a greedy market-maker. In those cases, I often put the order in with a little room to spare, so I’m almost sure to see it executed. Ultimately, if you are a buy-and-hold value investor, a few pennies a share won’t make any difference.
More Short Stories March 8, 2002February 21, 2017 Brian Annis: ‘There’s at least one more hazard of shorting stocks that you didn’t mention: your position can be called in at any time because the real owner of the shares has sold them. Worst case, this will happen on a huge rally.’ ☞ True! Ordinarily, when the faceless person who’s loaned the stock sells it, your broker just arranges to borrow it from someone else. You don’t even know it happened. But sometimes that’s not possible and you are forced to buy the now-even-more-preposterously overvalued stock to cover your short position. Jack Ratcliff: ‘And when managers of an overpriced stock use that overpriced stock to purchase other companies, anyone short the stock being acquired is in for really BIG trouble. In late August, 1998, when Clarify (a smallish software company) was in the $8 range, my friend asked about shorting the stock but did not do so because I mentioned the possibility that someone might buy them out. Sure enough, Clarify began a steady climb to an incredible $150! Only AFTER it had soared to the sky, did we learn that it was being acquired by Nortel (as I recall). His contemplated 1000-share short sale, if left uncovered, would have cost him an eventual $142,000. Not that I am so smart, but I did learn that in order to make a small fortune by shorting stocks, you need to start with a large one.’
Lucy, Tivo and the Peso March 7, 2002February 21, 2017 It’s an old story. Lucy holds the football for Charlie Brown to run up and kick – she promises to hold it this time – and just as he lets loose, she pulls it away and he’s flat on his back. How many times did Charlie Brown fall for that? Well, those of you who’ve read The Only Investment Guide You’ll Ever (Ever! Really! Ever!) Need (which I have recently finished revising yet again) know that, for one thing, it contains a lot of annoying parenthetical asides (why does this not surprise you?) and, for another, that, despite the revisions, it leads off every time with the story of the Mexican peso. I won’t recount the whole thing here – that’s why God invented libraries (it was the devil, I fear, who invented parentheses) – but basically, Americans casting about for better than the paltry interest rate available in Chicago or Spokane would stash their money in Guadalajara to get a higher return. Which seemed smart until – bang! – they awoke one day to find the peso devalued 40% against the dollar, meaning an instant 40% loss in the value of their savings. Each time I revised the book, I found myself adding a new sentence or footnote to acknowledge the latest such event. Because Lucy, often as not, had done it again. Well, today I sat at lunch with a Mexican-American businessman who told me he could get 7% interest down south, versus 1.5% from his bank here in the US, but that he wasn’t biting. The peso, he says, trading at 9.1 to the dollar, is way overvalued and should be more like 13 to the dollar. He doesn’t know when the devaluation is coming, but he believes that it will. I don’t know either; but in case you’ve decided to juice up the return on your savings by converting your fortune to pesos, atender! It seems to be coming around again. # And speaking of Mexico, I replaced my troublesome Tivo with a brand new Tivo2 the other day – so far, so good – and I was interested to see that it was Made in Mexico. To one eager to see Mexico prosper (as presumably we all do), it was heartening. Kevin Respecki: ‘If you’re having trouble with your Tivo, you should really look into the Replay TV4000 by SONICblue. With these models I’m going to be able to watch Detroit Tiger games here in Hawaii that are recorded by my brother in Michigan. Anybody with a Replay TV4000 can share whatever they record with anyone else who owns one over a broadband connection. Plus all the other goodies like ‘commercial erase’ and digital photo storage. Go to the SONICblue website and check it out.’ ☞ I did, and it seems like a good bet for someone who already has his computer connected to a home network, or is undaunted by the task of setting one up. (I am totally daunted.) Some of the advantages Replay offers over Tivo appear to have been matched by the new Tivo2. And some of the complaints I remember hearing about the Replay (a clumsy remote you couldn’t read in the dark) appear to have been fixed with the Replay4000. If we consumers are lucky, both companies will aggressively compete, taking turns leap-frogging each other with advances in features and – I hope – in ease of use that make it more and more fun to get old. I don’t know whether Tivo or Replay themselves will make it, but the Tivo concept surely will. Within just a few years, I can’t imagine any TV set being sold without the Tivo/Replay functionality that lets you stop live TV – just freeze Tom Brokaw in mid-sentence while you answer the phone – and then start him back up again or have him repeat what he just said or watch him in slo-mo. I can’t imagine TV’s not allowing you to automatically record your favorite programs, as Tivo and Replay do now, without having to keep track of what time or channel they’re on. And commercials? I watch them sometimes, but only when I want to. It takes me only 20 minutes to watch the news each night (I fast-forward through the commercials and the story about . . . well, there’s always one skippable story), and that saves me 3,000 minutes a year, or 50 hours.
Really? He Anointeth His Head with Oil? March 6, 2002February 21, 2017 How do we get Rush Limbaugh to read David Brock’s new book? For months, in years gone by, Brock was the source for some of the most scathing charges Rush ever leveled – which is saying something. Rush even read portions of Brock’s journalism on air. Now it turns out – according to Brock – many of those charges were bogus. Nor was Brock alone in playing dirty. Even Theodore Olsen, Brock says, who currently serves as United States Solicitor General, encouraged the sleaze (in particular, the suggestion that Vince Foster was murdered, even though he believed it to be untrue). Seriously: how do we get Rush to read this book. Or, for starters, to read this review of it? Because Rush has made more money than he could ever need, and because he has had that awful brush with deafness, my guess is that he is at a stage in life where he could surprise people. He could read the book and, in an act of extraordinary courage, join in David Brock’s apology. Brock was misled; Brock misled Limbaugh; Limbaugh misled millions. And now he can fix that. Oh, and how about this article about our Attorney General? You already know that he ordered a statue in the Justice Department to be draped, at a cost of $8,000, because it showed a female breast. You know one of his top aides has claimed that the A.G. believes calico cats are a sign of the devil. You know about his ‘We have no king but Jesus’ speech to the good folks at Bob Jones University. What I did not know (if this article from the Guardian is accurate) was that his dad was a Pentecostal minister who spoke in tongues, and that each time he has been sworn in to political office, he has had himself anointed with cooking oil – most recently, the Guardian reports, by Mr. Justice Clarence Thomas. The same Clarence Thomas who, a decade or so earlier, watched silently as David Brock attempted to destroy Anita Hill’s reputation (‘a little nutty, a little slutty’). Could Justice Thomas possibly have even heard of ‘Long Dong Silver?’ It was beyond preposterous. From the above-linked Hendrik Hertzberg review in the New Yorker: Brock and Clarence Thomas’s other supporters had portrayed him as having a prudish distaste for pornography; Mayer and Abramson reported that, on the contrary, he was a habitual renter of hard-core videotapes. While looking for a way to refute this, Brock concluded that it was true. Nevertheless, in his review [of the Mayer/Abramson book] he wrote that there was no evidence-none-“that Thomas had ever rented even one pornographic video, let alone that he was a ‘habitual’ consumer of pornography.” “When I wrote those words, I knew they were false,” Brock writes in Blinded by the Right. [H]owever, to protect myself and my tribe from the truth and consequences of our own hypocrisy, smears, falsehoods, and cover-ups, I consciously and actively chose an unethical path. I continued to malign Anita Hill and her liberal supporters as liars. I trashed the professional reputations of two journalists for reporting something I knew was correct.” Now, let me be quick to put in a strong good word for pornography and another for speaking in tongues. I am not big on either one, but I enthusiastically support your right to enjoy them both. Quite seriously. Tens of millions of decent Americans – including Mr. Justice Clarence Thomas, apparently – get private pleasure and/or satisfy human needs with pornography. When the actors are not exploited, what’s wrong with that? (But hey: would you straight people please stop trying to get me to open e-mails with fathers allegedly doing terrible things to their daughters, ‘horny school girls,’ ‘lusty farm girls,’ ‘nurses ——- their patients,’ and teen-age co-eds allegedly doing bizarre things with farm animals? Bad enough I have to get all this spam about FREE LIFE INSURANCE QUOTES.) In a free country, what’s wrong with having the liberty to pursue happiness any way we want, just so long as it doesn’t hurt anyone else? Same goes for the cooking oil anointments, the calico cats, and anything else John Ashcroft is into that doesn’t interfere with his sound judgment and the passion with which I hope he defends the separation of church and state. But is it possible that he failed to tell the whole truth when, during his confirmation, the subject of Missouri’s desegregation fracas came up? Or that, given the depths of his religious beliefs, he lied when, during those same hearings, he denied blocking James Hormel’s ambassadorial nomination because Hormel was gay? Would it have been more truthful for him to say (in the manner of Jack Nicholson at the end of A Few Good Men), ‘You’re damn right I did!’
What to Hold in a Roth vs. a Traditional IRA March 5, 2002January 25, 2017 Paul Berkowitz: ‘A lot has been written about allocating funds between taxable and non-taxable accounts. But I haven’t seen any advice regarding allocation to Roth IRAs versus regular IRAs. Any suggestions as to which investments are optimum for each? Is it different depending on the time line? (I am 55 and within 5 years of retirement.)’ ☞ Hmmm. Well, first let’s repeat what you already know with regard to taxable versus nontaxable accounts: Put high-yield securities like bonds and REITs in tax-deferred accounts; likewise, tax-inefficient funds, if you buy them. (But why do you buy them? They also have higher fees and higher internal transaction costs weighing down their expected performance.) Put low-yielding securities and tax-efficient mutual funds (like index funds) in taxable accounts. Also, perhaps, international stock index funds, because the “foreign tax credit” they pass through can only be taken when held in a taxable account. Keep your risky holdings in taxable accounts, so that if you lose money, you can take the loss against your taxes, and if you make a big long-term gain, you get the nice low capital gains tax rate. (In a tax-deferred account, all the long-term gains ultimately get converted to ordinary income.) But what about your question? If you had both a recently established Roth IRA and a longstanding traditional IRA, what should you put in which? In the first place, I’d put all my new money into the Roth IRA as opposed to the traditional IRA. It will grow not just tax-deferred but tax-free. And there will be more flexibility (and less paperwork) when, sometime after age 59-1/2, you go to withdraw the money or pass it on to your heirs. Beyond that, I guess I would argue that dollars within the traditional IRA are less valuable than Roth dollars, because they will be taxed as withdrawn. (Dollars in a Roth IRA are worth $1 when withdrawn; dollars in a traditional IRA may be worth only 75 or 80 cents, perhaps even less.) Being less valuable, it’s less awful if you lose them. So as between two investments of varying risk, maybe you’d put the one you perceive as riskier in the traditional IRA. Then again, if the asset is riskier it may offer a higher hoped-for return. And if that materializes, you’d want to reap that higher return tax-free rather than have to share any of it with Uncle Sam. So if you could know your winners from your losers in advance – which you obviously can’t – you’d put the winners in the Roth and the losers in the traditional IRA. The one thing you can know is that risk diminishes with time. It’s quite risky to have your money in an index fund (say) for just a year or even three. It could drop precipitously. But over 25 years, if history is any guide, it is likely to do quite well – particularly if you are adding to it periodically, and thus reaping the advantages of dollar-cost-averaging. This argues pretty strongly for putting the riskier assets – the stock index fund, say, versus the bonds or TIPS – in the Roth IRA, for two reasons. First, the stocks, over time, are likely to outdo safer investments. Second, with a Roth IRA there’s no requirement to withdraw funds. With a traditional IRA, by contrast, once you turn 70-1/2, you must begin withdrawals, even if the stock market is in a trough. With the Roth, you or your heirs (if you can live without the money and chose to pass it on to them) can wait for a market peak, instead. Indeed, if you can afford to pay the taxes on the conversion, you might keep your eye out for a good year to convert some or all of your traditional IRA to a Roth IRA. Yes, you would pay tax now to do it. But having done so, that money grows and is eventually withdrawn entirely tax-free. And with no time limit on when you must begin making withdrawals. When to make such a conversion? Perhaps in a year when the value of your traditional IRA has been beaten down by a bad stock market. Convert it, paying the tax out of other savings; then watch it (eventually) grow back to where it once was, and beyond, forever free of tax. Either way, as you near the age at which you plan to start withdrawing from the IRAs – which may be 59-1/2 but need not be until 70-1/2 for a traditional IRA or ever for a Roth – you might want to begin taking less risk in either one . . . and especially less risk in the Roth, as those dollars are more valuable. Try to put winners in both, wish yourself luck, and go to the movies. But not before you read John Bogle’s remarks referenced in yesterday’s column, if you missed them, because they go a long way toward demystifying finance.
Investors: This Is Really Important March 4, 2002February 21, 2017 I know, I know. What to put in a Roth versus a traditional IRA. Like an author at 12:50 in the morning at the end of the old 90-minute Johnny Carson ‘Tonight Show,’ it keeps getting bumped. (But Johnny, I flew all the way out to Los Angeles!) Well, Johnny had his reasons and so do I. One of you (thanks, Paul Romaine) was good enough to direct me to what is very possibly the most important financial statement of the new century – by Vanguard founder John Bogle, not surprisingly – and I wanted to waste no time in commending it to you. Click here for the whole thing. And – because it is long – know in advance where it’s headed. In his remarks Bogle: reviews the ‘happy conspiracy‘ that leads to poor economic decisions and inflated stock prices that come back to bite us; explains and debunks the ‘managed earnings‘ game; lambastes the unrealistic assumptions managements have made about their pension fund returns (thereby to inflate earnings and the value of their stock options); attacks those executive stock option packages as obscene, ill-conceived and harmful to the shareholders (doing a much better job of it than I did in yesterday’s PARADE); attacks auditors (see, also, Floyd Norris’s excellent column on this in Friday’s New York Times), calling for a ‘a nationally-chartered Federal Accounting Commission’ to push for better financial disclosure standards; examines the perilous condition of our collective retirement prospects (25% of those eligible to participate in 401k’s do not; 18% of those who do participate borrow against their already-too-low 401k balances to finance current needs; far too many participants have all or most of their money tied up in their own company stock when they should have 10% or 20% at most; and where participants had just 30% of their 401k assets in stocks in 1990 – when stocks may have been fairly priced – that had risen to 81% at the start of 2001, when stocks, sky-high, offered much less value); and, finally . . . proposes something really important: namely, that the 75 or so top money managers, who collectively control more than half the shares in corporate America, form some kind of ‘Federation of Long-Term Investors’ to be a louder and more effective voice for shareholders. For example, they might push to have executive compensation plans tied more closely to business performance than to stock performance (giving incentives to build value rather than manipulate earnings or simply ride an upswing in the stock market generally) . . . push to have the cost of those options be reflected in earnings (they are not free, as current accounting pretends) . . . and more. It is a really important speech. And Bogle has the stature to change the world. He’s already done it once – over the decades, his Vanguard Group has saved investors billions of dollars in mutual fund fees. Maybe he can do it again. Click here.
Short Iraqi REITs at Twice the Price March 1, 2002January 25, 2017 THE NEW, HIGHER PRICE OF THIS COLUMN Bill Kistler: ‘>> Starting March 1, the price of this column doubles.<< Oh sure, and I bet you have an unsubscribe fee too!’ ☞ That’s where I make most of my money. REITS: AARON’S PICK Aaron Stevens: ‘You might advise M. Farbiarz to look into Equity Residential REIT (EQR). First, it has fantastic management pedigree (Samuel Zell has been in this business for his whole life). It invests in rental housing all over the country. I feel this is type of REIT is much more stable in an economic recession than those that build shopping malls or trade mortgages, but still has plenty of upside potential if/when the boom times return. Even better, EQR pays a handsome dividend (approaching 6.4%), and has consistently increased the dividend by about 8-10% per year.’ REITS: WHY PICK ‘EM AT ALL? Eric Haas: ‘I think it interesting that you advocate index mutual funds in your book, but you advocate individual securities on your web site. Rather than suggesting an individual REIT, how about a no-load REIT Index Mutual Fund, like the Vanguard REIT Index Fund? Isn’t diversification a good thing?’ ☞ Yep. But there’s also this issue I should have addressed yesterday. Just how closely do REITs correlate with the housing market? Answer: not as closely as you might think. What they do correlate with pretty closely is interest rates – inversely. That is, when interest rates go up, REITs come down. And interest rates may by now have at least as much room to rise as to fall. Robert Rogers: ‘If interest rates go up over the three years that M. Farbiarz wants to buy a house, he may be faced with higher interest rates on the mortgage he may need and a lower investment value in his REIT shares.’ SHORTER STILL David Morrison: ‘Two more factors that work against selling short: The long-term trend of the economy and the stock market is up. The long-term trend of the value of money is inflationary.’ ☞ So true. And a third is a point Warren Buffett has made (thanks to Roger Farley for reminding me of this) – that the managers of companies with overvalued stock can sometimes use that overvalued stock to acquire other companies, becoming at least somewhat less overvalued in the process. IRAQ and IRONY An interesting article in the Financial Times of London points out the leading role Halliburton played under CEO Dick Cheney in supplying Iraq with needed oil-drilling equipment. It was legal – just a bit ironic. The article appeared November 3, 2000, long before the average American felt any real threat from bad guys abroad. In these days of the Axis of Evil, it has resurfaced. It makes an interesting contrast to then-candidate Cheney’s remarks the previous August in an interview with ABC’s Sam Donaldson: Donaldson: ‘I’m told, and correct me if I’m wrong, that Halliburton, through subsidiaries, was actually trying to do business in Iraq?’ Cheney: ‘No. No. I had a firm policy that I wouldn’t do anything in Iraq – even arrangements that were supposedly legal.’ # Monday, really this time: What Should You Put in Your Roth, Versus Your Traditional, IRA?