collage of money, charts, student working and graduating

In the Starting Block

Over the years, I’ve talked with many young people about their desire to invest.  Almost to a person, they are interested in investing because there is a popular, new product or service that excites them.  This excitement helps them want to invest in that company, even if they are neophytes to the investment world. This does not bother me, as I love seeing people be motivated to become active in our economic system.  The issue arises, however, that what is a cool product may be an investment that is about to mature in its attractiveness.

My friend’s son has me manage some investments for him. When we began our relationship, he wanted to talk about investing in Tesla motors.  This was in the fall of 2014 and Tesla (TSLA) was selling in the neighborhood of $240 per share. Yes, in four years TSLA had become a ten-bagger, having risen to $241 from an October 2010 price of $21. To him, this looked like a great investment and, it would be, if that rate of appreciation had continued.  Instead, in the fall of 2015, TSLA was selling for $207 (a loss of 13.7%) and the good news is that, today, it is selling for $262 per share (a gain of 8.7% from the 2014 price). One does not know if the “investor” would have still been in the stock or would “the emotional trader” have sold when the price was low.

Have you ever eaten at a Chipotle (CMG)? They do have good food and, in the fall of 2014, their stock was selling at price of $638, having risen from a first month’s (January 2007) price of $45.60, or 1,299%!! Of course, we all want on that bandwagon but, had you purchased CMG in the fall of 2014 with the hopes of winning the race, you would now own shares worth 28.2% less than at purchase. You did not imagine that there would be an e coli outbreak at the fast-food chain.  As a result, it looks like you’re a little behind in the race – not winning.

Similar stories can be told about other stocks and, of course, there are real success stories where fortunes are made on the current, coolest thing to hit the market in years. Yet, for a beginning investor, looking for a way to invest in the market, I always recommend a couple of things.  One, I ask, “How long are you able to invest the money without needing the principal?”  Before you invest in the stock market, this time period should be no shorter than five years and, preferably, longer.  In the above examples, had you gambled your house-down payment-to-be on either of these single stocks, instead of the return you had hoped to receive you may receive less and, perhaps, lost some of your down payment if a house purchase is relatively soon. If the beginning investor believes that they can invest for over five years and they want to get started, I recommend that they consider an index mutual fund or exchange traded fund. What would have happened to this investment over the eighteen months from October 2014 to today?

In October of 2014, the Standard & Poor’s 500 Index ETF (SPY) was selling for $195.49 per share. Currently SPY is selling for $204.19 and sports a 2.1% dividend yield. This is approximately an annual yield of 4.96%, although in January of this year SPY had a price a little less than $193 per share for a 1.4% loss to be recouped by April.  Moreover, this return came with a lot less volatility than in either of the “cool” stocks above. Why? Diversification.

Purchasing a single investment is risky.  Being risky, you may make a lot of money, if it turns out to be a great company. Being risky, you may lose everything, if it is a poor investment. You do not know. On the other hand, by investing in an index mutual fund with a focus on the United States, you will have purchased a little of every company in the index and will have taken a position that represents the largest companies in the United States.  This reduction in risks, lowers your expected return, while reducing your risk.  Moreover, an investment in The Market of the United States, provides you with an investment for the long-run. (You will not have to worry about little things like food poisoning getting in your way.)

Never forget that financial success follows from your discipline to save money over a long period of time in a diversified portfolio. If you do this, while not as exciting as watching a rabbit zig-zag across the yard, you will be successful. For, just as the fable of the turtle and hare attests, slow and steady will win the race. Swinging for a home run with your investments may seem attractive. It is, however how most batters strike out.

Use Spring Cleaning to Air Out Your Finances

Many people engage in spring cleaning to clean out the clutter that has accumulated during the winter months. This is a good time to air out your finances as well. If you have had some major life events since the last time you examined your financial life, you might discover some dusty financial accounts that you had forgotten about.

As people age, checking and savings accounts may accumulate. One of the first tasks involved with moving to a new location is to set up accounts with local financial institutions; however, people often forget to close down the accounts at the place they moved away from. Similarly, married couples often open new joint checking and savings accounts, but they may leave old accounts from their single years open. Savers interested in the highest interest rates move their money around as they chase after the highest yielding accounts. They may also leave their old accounts open either due to neglect or on the chance that the account may again be an interest rate leader.

The accumulation of dusty accounts happens with retirement accounts as well. Employees will change jobs and often leave their 401(k) or 403(b) with their former employer. Employees that are quickly climbing the corporate ladders between companies may find themselves with several retirement accounts, each having different rules and investment options. Keeping tabs on each of these accounts and maintaining an overall picture can be daunting.

What are some of the problems with leaving accounts open? First, it makes recordkeeping much more complicated. Receiving multiple statements in the mail at the end of each quarter or month can strain simple recordkeeping systems, especially if the accounts hold negligible amounts of money. Furthermore, multiple accounts can cause headaches at tax time. If you receive an interest statement showing that you earned $25 in interest after you’ve filed your tax return, you will have to amend your return with the complicated and costly 1040X. The $25 interest may cost you upwards of $150 in additional tax preparation fees. Second, you may be charged inactivity fees if your account shows no activity. These fees, ranging from $5 to $10 per month, may slowly eat away at your account balance, until your account turns negative. Thirdly, it may cause headaches for your heirs. If you have a hard time keeping track of your accounts, imagine what your heirs will feel as they try to untangle your financial situation.

So, what to do: As the earth renews itself this spring, take some time to shake out the dust and breathe new life into your financial plans. Step back and examine your entire financial situation. Are you meeting the goals you’ve set for yourself financially? If you haven’t set any goals, now might be a good time to set some after you’ve organized your financial life. If you have multiple old checking and saving accounts, decide if you really need them and close the unneeded accounts. Consolidate your accounts so that your financial situation becomes less stressful and easier to manage. If you have multiple retirement accounts, you might want to consider rolling them into your current employer’s retirement plan or into your own retirement account at an independent financial institution. Take some time to review your will and other end-of-life documents. If situations have changed since the last time you updated the documents, draft and sign new documents reflecting your current situation.

Taking care of these details now will likely make the financial aspect of your life less stressful for you throughout the year.

The Missouri Veterans Commission – One of the Best Kept Secrets in Missouri

If you think you or someone you love may qualify for VA benefits and you don’t know where to start, there is a great resource that can help. I learned about this resource as I was struggling to navigate the VA bureaucracy to assist my 90-year-old mother, who survives my father, a World War II veteran.  She qualifies for aid and attendance benefits.  When we initially applied in late 2010, I submitted VA paperwork on my own and waited ten months to get a response, which asked for additional documentation in language that was difficult to decipher.  I gathered what I thought they needed and sent it in.  My husband and I were providing care for my mother 24/7 and I was still working full-time. We waited in frustration for another few months, got one more request for even more information and finally, after more than a year, my mother was approved for benefits so she could afford the assistance she needed.  Without that assistance, my family could not have provided in-home care for much longer.

As my mother’s health has continued to deteriorate, she has needed more care.  Last fall, I filed a request for additional benefits.  This time, I heard back within four months – with a request for additional documentation.  I was feeling emotional and overwhelmed and a local elder care manager suggested that I go to the Columbia Veterans Service Officer for assistance.

I just left his office this morning feeling relieved and grateful because he took the piles of paper I have accumulated over the last five years, read the VA’s latest request for documentation and, within an hour, had explained the situation to me in terms that made sense, completed the paperwork for me, and submitted it to the VA.  He assured me that we should have the additional benefits direct deposited within the next three months.

The Missouri Veterans Commission, through the Missouri Department of Public Safety, has 41 highly trained and accredited Veterans Service Officers located across the state.  I have worked in financial education for more than 23 years.  I was vaguely aware that there was a “Missouri Veterans Commission,” but I had no idea what a resource they are and I had never heard of Veterans Service Officers. Their job is to assist veterans or their dependents in filing for VA benefits. They offer counseling on available VA and state Veterans’ benefits and they complete and submit VA claims applications and necessary documentation on veterans’ behalf. There are Veterans Service Officers in every state. I cannot say enough good things about the Veterans Service Officer who helped me.

Don’t go it alone if you need to apply for benefits.  In Missouri, you can find a Veterans Service Officer near you at the service officer locator at http://mvc.dps.mo.gov/service/serviceofficer/. I wish I had known this five years ago!

Investments 101 (a review)

The stock market has shown itself to be very volatile in 2015. So volatile, that many have left the market, some see it as a time to look for buying opportunities, others worry about a return to the great recession, and we long-term investors are doing our best to tune the noise out and to keep our faith in the future of the world’s economies.
We’ve all heard reasons for the markets retreat in 2016.  If not, here is a sampling, along with my commentary.

  1. The Chinese economy is tanking – Yes, the Shanghai index peaked last June 12 and the index is down 48% since that date.  Yet, the index remains up 31% over the past two years.  As for the Chinese economy, they do have some problems and the largest is a rate of growth that has decreased to 6.9% – a rate that most countries would love to have!
  2. The Federal Reserve Bank is raising interest rates – Really?  Who did this surprise?  Most people have asked, “Why did it take so long to happen?”  Even so, the economy is showing some weaknesses, particularly given world dynamics.
  3. The price of oil crashed – All commodities have fallen since 2011, although several have shown robust growth in 2016.  Gold, for example, has led other investments for this calendar year, with a 15.7% return.  It remains, however, about 26% below its most recent peak in 2010. Just yesterday, I noticed that gasoline is about 14% more expensive than a week ago and today’s price is still relatively inexpensive.  We have to go back to 2004 to see prices like we see today. This should be good for the consumer which is good for the economy – except if you are a producer of oil.
  4. The strong dollar – I don’t think a strong dollar can decrease the value of the stock market. In fact, we know that citizens of other countries, when they perceive weaknesses in their economies, move money to the United States and they purchase our securities.  This one is hard to judge.
  5. Trump and Sanders – This might have some veracity. I don’t think that most of the investing public, either domestic or international, predicted that these two candidates would be doing as well as they are.  With ideas ranging from protectionist trade and forced deportation to free medical care and university education, these ideas have the heads of members of the status quo spinning.  Markets don’t like uncertainty.
  6. The Cubs might actually make it to the World Series – No one has actually said this has caused the market to be down. I just thought I’d throw it in the mix of wild ideas.

One thing is certain.  The market will survive and it never hurts to review what we know, in order to help us reach financial success.

Below is a graph of returns for stocks as measured by the S&P 500 (blue), 10-year Treasury bonds (green), and Treasury Bills (red) from 1994 through 2015.  During this time period, the S&P500 had an average annual return of 10.7% with a standard deviation of 18.7%, 10-year Treasury bonds saw a 5.9% average annual return and a 9.7% standard deviation, and T-Bills a 2.6% annual return and a 2.2% standard deviation.  It is clear that if we wanted to reduce the risk in our portfolio, we would simply buy T-bills and be content with the relatively flat line for the twenty years.  While that may make one sleep better in the near term, it is likely that one may not eat well in the long term, for taxes and inflation will greatly reduce the return.  So, what can we do to reduce the volatility?  The answer, as always, is diversification.

Investment returns 1994-2014

When we invest 60% of our portfolio in the S&P500 and 40% in ten-year Treasury bonds, it reduces our return by 17.8% (from 10.7% to 8.8%) , while the riskiness of the portfolio is reduced by 43.9% (from 18.7% to 10.6%).  Over these twenty years, by replacing 25% of 10-year Treasury bonds with Treasury-bills, the return is driven down to 8.4% with very little, if any reduction in risk. This can be seen in the following chart where the blue line is 100% invested in the S&P 500, the red line is for the 60%/40% portfolio, and the green line the portfolio of 60%/30%/10% which includes 10% Treasury-bills.  As can be seen both of the latter two lines are very similar but they do remove variation in the annual returns of the S&P 500.

Portfolio returns 1994-2014

What does this do to us over the longer-term?  The answer can be seen in the table below, where we assume that $5,000 is deposited to an account at the beginning of the year for both 30 and 40 years.  As can be seen had one been invested in 100% of the S&P500 for every year, instead of the 60%/40%/10% portfolio, their wealth at the end of 20 years would have been 22% greater ($737,708 compared to $603,039).  Due to compounding, this increases over 40 years to 33% greater future value ($1,823,347 compared to $1,370,886).  Clearly, discipline is good if one can handle the inevitable ups and downs.  Most of us cannot.

Interest/Year 8.964% 8.274% 7.925%
Payment/Year $5,000 $5,000 $5,000
Number of Years 30 30 30
Future Value $737,708 $644,997 $603,039
Number of Years 40 40 40
Future Value $1,823,347 $1,507,715 $1,370,886

Another reason to support being well diversified is the following “periodic table” of investment returns.  For each year the category with the greatest return is listed at the top, while the one with the lowest return is at the bottom.  One glance will tell you that there is not one category that is at the top, or the bottom, each and every year. Moreover at the beginning of the year we never know which category will be at the top at the end of the year. You will see that it is rare that any category of investment has the same placement in two consecutive years. In fact, it occurs only 12 times in the 100 year-pairs below.

periodic table of investment returns

So, what do we do?  One needs to have a plan to remain well diversified with a riskier mix of investments the further in the future the money is needed.  Short-term goals will be funded with cash type investments, intermediate term goals with a balanced approach, and long-run goals with a more aggressive approach. At least once per year, the investor should rebalance their portfolio to assure that the mix they wish to have is truly the mix they have.  This will naturally force one to sell those categories that have performed well and to buy those which have not.  To repeat a recent Financial Tip, this assures that you will sell high and buy low – as opposed to the other way around.

If Home Repair Offer Sounds Too Good, Watch Out

Spring will soon be here, and so will warmer weather and more opportunities to enjoy the outdoors. Here in the Midwest, Spring can also bring storms, flooding, hail and tornados. Severe spring weather could leave you looking for help with home repairs. While there are many legitimate businesses that offer home repair services, it is important to be cautious in order to avoid home-related repair fraud.

This can be especially true when an area experiences severe weather that results in a large number of insurance claims being made. It’s also common for the elderly to be prime targets for these repair schemes, since many seniors own their homes and frequently need help with repairs. However, with damage left by flooding or other disasters, people of any age could become victims if they aren’t careful.

Warning signs to watch for include:

  • Someone comes to your door with materials left over from another job
  • Prices are much lower than other estimates
  • The price is only available today
  • The company uses a post office box and has no street address or telephone number
  • Full payment is due before the work is completed
  • The contractor will not give you references

In order to get the job done right, know what you want done before talking with legitimate, local contractors. Ask for identification before letting anyone into your home. Get detailed estimates, in writing, from several reputable, licensed contactors and find out if the contractors are insured and bonded.

It’s important to know who you’re dealing with and be aware that someone showing up on your doorstep may be targeting you. Ask for references, check them and ask about the availability of warranties on repairs or materials used. You can also find out more about potential contractors by looking them up on third party review sites such as www.angieslist.com or www.houzz.com, or see how they rank with your area’s Better Business Bureau (www.bbb.org).

Finally, get a written contract before the work is started to avoid surprises or misunderstandings, and make sure this includes the company’s address and telephone number. If you suspect fraud, contact local authorities immediately and your state’s Attorney General’s Office (in MO, the Attorney General’s Consumer Protection Hotline is 800-392-8222).

Remember, if it sounds too good to be true, it probably is.

– Janet LaFon, Family Financial Education Specialist, University of Missouri Extension