Case Study #10: Should Josiah buy his parents a house?

house in iowa

No! No, no, no. A thousand times, No!

Or maybe, just maybe…

For this blog, two great things about the Ask jlcollinsnh posts are that they help me understand the real world concerns of my readers and they provide ideas for a steady steam of great Case Studies. These are ideas and topics I would have never thought of on my own.

But today’s is a little different. This one gives me a chance to share a story I’ve had pending in the files for over two years. Josiah is contemplating a move quite similar to one I made long ago and his asking about it was just the spur I needed.

Josiah:

Hello Mr. Collins

I have loved reading your website! It is the exact information that I have been craving in regards to where the heck to park my money.

My wife and I are on the road to FI. We have a few more miles to go (10-15 years) but we are on our way. My goal is to never “have” to work a day after my 42 birthday.

With all that being said, my parents are 50 and 53 respectively and are not destitute but pretty poor. They have jobs that are a bit above minimum wage but absolutely nothing in the realm of savings or pensions.

My wife and I have realized that we will be ultimately responsible for them in roughly 30 years as my brother is not in the best boat financially and has expressed disinterest in taking care of them, because of different family issues.

I am going to help them get a Vanguard account and put a bit of money aside for them each month. The big problem is that they are currently spending 600 dollars a month in rent in the middle of Iowa, which is normal if they had kids living with them, but as my brother and I are gone, it’s a bit much, especially with them making just over ends meet.

My question is would it be prudent to buy a cheaper property and rent it to them so they could cut their rent in half, and then after it is payed off when they are in their 80′s that expense will basically be non exist? There are plenty of houses in their community that could be had for around $50K-$70K.

I have read your post about how real estate is not the best investment and I am realizing that I really don’t want to make a habit of getting rentals, but I am wondering since you have owned a house before, is it worth the extra costs that will be associated with owning a home, to provide that stability for them, or should we just find them a cheaper rental?

Thanks for all you do,
Josiah

jlcollinsnh:

Welcome Josiah…

…and thanks for the kind words! Glad you found your way here and thank you for the question. I have actually long been planning a post about the time I did exactly what you are considering. It was a major mistake and I’ll share that story with you, along with some thoughts as to how you might evaluate the decision for your unique circumstance.

But first, congratulations on having your feet firmly on the path to financial independence! And for being clear-eyed enough to see that your parents are not and that this is likely to become your problem. The good news is you will have positioned yourself well to help.

Here’s my tale:

Back in ’79 I was young, single, renting, making good money and very foolish.  I bought my mother a condominium, for reasons much the same as yours. It was just about the worst decision I could have made, both financially and psychologically.

My father died in 1974 and in 1976 my mother sold their house and moved to Florida to escape Chicago’s winters and to be closer to her retired brother. She took the proceeds from the house and invested in some dividend paying stocks to supplement her Social Security. She found a lovely apartment near her brother and settled in.

Unfortunately, her stocks failed to keep pace and her rent continued to rise. By 1979 she was expressing grave concerns.

Now, with the benefit of hindsight I can see her concerns were greatly overblown. But at the time I got swept up into them, as us good sons are prone to do. Plus then, like now, (like always, really) the vested interests in the real estate business were relentlessly pounding the drum of how wonderful owning property is.

On a visit I rashly told her I would solve her problem by buying her a condo. I gave her a budget of 40k, a fairly hefty sum in those days, and told her whatever she found in that price range that she liked was fine with me. We agreed she would pay me her current rent of $300 a month and I would absorb the difference and all future cost increases. Not surprisingly, this worked exceedingly well for her. For me, as we’ll see, not so much.

She found a beautiful 2-bedroom, 2-bath unit in a very nice complex. It was a step up from where she had been and it came in under budget. It looked like a pretty neat, if expensive, solution.

To see just how expensive, let’s run the monthly numbers:

$390 — Mortgage payment (interest rates were much higher in those days)

$125 — Association fees

$50 — RE taxes

$565 — Total

So I knew going in I would be supporting mom to the tune of $265 a month. And I was good with that.

But there were two big things I naively hadn’t counted on.

First, I was now her landlord and as such she turned to me for improvements on the property. Not all at once, but over the years:  New appliances, carpet, painting and other costly stuff I don’t remember. Maybe because they paled in comparison the the second thing I hadn’t counted on…

men at a table

The Association

See, this was a building owned and operated by geezers who were retired and had cash on hand. They wanted to keep their money in their own pockets as long as possible and so were loathe to pay a little extra each month to build a contingency fund. The monthly assessments covered only the monthly costs.

So about once a year, sometimes twice in the bad years, I’d get a notice announcing a “Special Assessment” had been approved to re-pave the driveways or re-roof the buildings or some such, and telling me my share. Typically $5-6000. Oh, and by the way, it is due next Tuesday.

Now this is a perfectly fine way to do things for retired folks with money in the bank. But each notice sent me into a mad scramble to pull the cash together in time. At least the first couple of times. After that, I created my own contingency fund.

My mother lived there for about seven years, until 1986. Each year, of course, these costs marched ever higher. Fortunately so did my income, but the cash hemorrhaging was always a shock. Meanwhile, Florida went into one of its routine real estate collapses, just in time for my sale of the property.

So it was financially ugly. But expensive as it was, that would have been OK. It did solve my mother’s problem. But then there was the psychological factors that came in to play. Those started before the condo was even bought.

The Saturday after I returned from my trip to Florida, the one where I had told my mother I would do this, I got a call from one of my sisters. She was not happy.

She got it into her head that somehow I was exploiting our mother and that I was going to make a financial killing on this condo. Now I had no idea at the time just how financially ugly it would get (had I known I would have run for the exits) but I could certainly see that there was no monetary killing to be made.

When she got done yelling at me (and this took a while) I told her I really didn’t want to do this at all (I didn’t) and if she wanted to I would be happy to step to the side and out of her way. Unfortunately, she said she couldn’t afford it. She later suggested we buy it together but, after all the harsh words, I was uninterested in a partnership. That might have been my only smart decision in this sorry affair.

My other sister was considerably more financial savvy than either of us. She could see both the hole I was digging for myself and the way it would ease her share of the burden of providing help to our mother.

Now here’s where the psychology gets really interesting. My mother was a smart woman. She understood intellectually that I was supporting her to the tune of hundreds of dollars each month, thousands each year. But she never saw that money. What she saw, and felt emotionally, was the $300 check she wrote and mailed to me each month. Wrote and mailed to (cue me twirling one end of my imaginary handlebar mustache) her landlord.

Meanwhile, when my sisters would visit once or twice a year, they’d slip her $100 to “help with the extras.”  A kind and generous gesture that she very much felt emotionally. And, of course, when I’d visit I would get to hear in detail just how kind and generous my sisters were and what a blessing in a mother’s life such children are.

Now, a better man would not have been bothered by this. I am not that better man. I was the guy doing the heavy lifting.

As a postscript to this story, and in fairness to my sisters, when my mother took ill and moved back to Chicago for the final two years of her life I was living in Cleveland. The heavy lifting of her care fell to the two of them. In retrospect, mine was the easier burden.

So that’s my sad tale. What should I have done instead? That’s easy. I should have said to mom on that trip: “Don’t worry about your rent increases. Just let me know and whatever the amount over the $300 you are now paying I will send to you.” Much cheaper for me. Better psychology, too.

Oh, and then I’d’ve had plenty of spare hundred dollar bills around to slip her on my visits. You know. To help with the extras.

So, enough about me, Josiah. You can decide for yourself how much of this little tale potentially relates to your situation. But here are my thoughts for you….

First, buying your parents a house is likely to turn out to be much more expensive than you might anticipate. While you won’t have association assessments, you will have an endless parade of repairs as all houses require. If your parents are unable to handle these repairs or arrange for them to be done, those efforts will fall to you. As will the costs.

And, of course, the house will have all the drawbacks I describe here: Why your house is a terrible investment.

So why isn’t my answer a simple short and sweet:

Don’t do it!!?

The $600 rent and the houses available for 50-70k you mention is why. This suggests rentals are thin on the ground and pricy, while houses are easily and cheaply available.

You may have read this post: Rent v. Owning, opportunity costs and running the numbers. If not, please do. In it I describe just how to evaluate your choices and compare them financially.

In my experience, renting is most often less expensive. But not always and, from the rough numbers  you’ve shared for where your parents live in Iowa, maybe not for you and them. So run the numbers and see where you stand. Owning just might be the less expensive choice.

But for me, the financial case for owning would have to be very compelling before I’d accept the downsides in this situation. When I’ve owned houses they were expensive indulgences I could afford and the benefits made me willing to pay the costs.

In your case, supplementing your parents rent might be the expensive indulgence. Only the numbers will tell. But if renting proves more costly, personally I be willing to pay a fair amount to avoid the hassles and pitfalls.

One final thought.

You mentioned your intention to open and fund a Vanguard account for them. This is a fine and generous idea, but I’d keep it in your name. Unless your parents are willing and able to embrace your style of fiscal discipline, and that doesn’t appear likely, in their name such a fund would be at too great a risk of being dissipated. Plus, if held in their name, upon their death your money will go to the heirs they choose.

Held in your name you retain control and your parents are spared the responsibility while still enjoying the benefits. Perhaps this is the greater kindness.

Good luck and keep us posted.

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Addendum #1:

At the same time as buying my mother’s condo I was buying one of my own. You’ll find that little adventure recounted in this series of posts: How I lost money in Real Estate before it was fashionable.

Posted in Case Studies, Homeownership | 36 Responses

Case Study #9: Lars — maximizing some good fortune and considering “dollar cost averaging”

college leaving

When I was first out of college and back in Chicago, it took me two years to find my first professional job. I filled the time trying and failing to launch an advertising agency and working for a landscaper. The first gave me something to put on my resume, the second put some much-needed money in my pocket.

That first professional job, when it came, paid the princely sum of $10,000 per year. They had originally offered $8500. Despite being bold enough (and that was pretty bold given I had no other prospects) to negotiate the higher salary, I still sat at my desk the first week or so wondering what I could possibly do for this company that would be worth ten thousand dollars!

Around this time I became friends with John P, a guy about my same age. From his grandfather, John had inherited a portfolio of stocks that produced an income of just about my salary: $10,000 per year. I remember thinking what a beautiful thing this was. Here was a guy who had all his living expenses covered and who was completely free to choose whatever path appealed, unburdened by the pedestrian need to earn money for food and shelter.

I lost touch with John when he moved to New York City. I often wonder how things turned out for him.

But as for me, his situation planted in my head for the first time the idea of having investments to do the heavy lifting of paying for life’s expenses. It would be a few years yet before I came across the term F-you Money and had a name for what had become my ambition.

Since I was groping blindly about in the dark and index funds were just being invented (and even once the news reached me I would still stupidly reject them for years), reaching this goal took far longer than it should have. Far longer than it will for the astute readers here.

But I’ve always wondered what it would have been like to have John P’s head start. Like him, would I have been smart enough to follow his grandfather’s advice and live on the investment returns, using the inheritance as a platform from which to build? I like to think so. It is certainly the advice I’d give to someone on the receiving end of such luck. Someone like Lars.

Just as I have little use for people who whine about not getting the breaks they think they should, I have even less use for those who fail to appreciate those breaks that come their way.

But Lars recognizes his good fortune and, as you’ll see, is busy making more of his own and is ready to work at making both pay off. Plus he presents an interesting scenario to explore.

Lars and his questions showed up in Ask jlcollinsnh last week. Here is our conversation:

Lars:

Jim,

I love your blog. I’ve read every single part of your “stocks” series, and send them to friends who ask me questions about investments.

I am a mid-20s man about to enter a very good financial situation via marriage to a great woman, also in her mid-20s.

We are both fairly thrifty and are completely debt-free. We have college degrees and steady jobs. We each have reliable, working cars that are paid-in-full. Our annual combined salary is about $125k, but will probably drop to $70k as we have children in the next few years.

Because a family member started a successful company years ago, we will receive about $6-7k per quarter in cash dividends.

We have already saved about $100k in combined 401k/IRA retirement savings (in VTSAX and index funds, thanks to your blog) and are maxing out our 401K/IRA accounts every year.

We have about $75k in combined cash savings. We don’t own a home or any other noteworthy assets. We live fairly frugally, and save about 40-50% of our after-tax income, and we plan to continue to do so in marriage.

Here are the details again in bullet form:

Total debt (student, credit, mortgage): $0
Combined annual salary (before tax): about $125k
Annual cash dividend: $25k (or $6-7k quarterly)
Current combined retirement savings: $100k
Current Cash savings: $75k

I know we have too much cash on hand, and I want to invest it. We’re not interested in buying a home soon, we would rather rent for a while. How would you invest our current cash on hand ($75k) as soon as we get married and how would you continue to invest $6-7k quarterly?

Any other investment allocation or other life-planning advice is MUCH appreciated.

Lars

good fortune Budah

The Good Fortune Buddha:

Shall we rub his belly or invest?

jlcollinsnh:

Welcome Lars…

…and thanks for the kind words and for passing the blog on to your friends. That’s the highest praise of all.

One of my pet peeves is people who look at the asset building strategies discussed here and dismiss them as accessible only to those who are very lucky.

You certainly appear to have been luckier than many who write me. But to your credit you are not squandering the luck that has come your way. Far too many would, followed by their complaints of how unfair life is.

So kudos!

The biggest risk I see for you is the lure of lifestyle inflation.

So my first suggestion would be to cap your spending at 35k, half the income you’ll have when the kids start coming. Or, if you are feeling really badass, live solely on that ~25k dividend and invest all your earnings. Then let your lifestyle expand only at the pace those investments grow.

That said, it sounds like you’ve already nailed my nine steps as described here: How I failed my daughter and A Simple Path-to-Wealth

Well done!

If you haven’t already, take a look at this: My Path for my Kid: The First 10 Years

While it seems you’re hitting most all these already, it never hurts to review as an aid for staying the course.

The 75k in cash I’d put into VTSAX. With your dual incomes and cash flow you can afford to have little or no emergency fund. This is especially true since you don’t own a house. Since houses require a relentless parade of often expensive repairs, they are the single biggest generators of the need for emergency cash.

While I am blissfully back to being a renter now, I’ve owned houses for over 3o years. In each case, I’m glad I did. But only because I wanted the lifestyle at the time. They are an expensive indulgence and as such should only be bought if and when that indulgence is worth the price and the price is one you can easily afford.

That may well be when your kids are around school age and school districts become critically important. But be sure to read this first, if only to be sure you enter homeownership with your eyes wide open:  Why your house is a terrible investment

Then to be sure you fully understand the financial ramifications in your particular situation, run the numbers as explained here: Rent v Owning, opportunity cost and running the numbers.

VTSAX is also where I’d put your investable cash flow, either from those dividends and your saved income or from all your income as you live on the dividends.

First, of course, fully fund your 401k and deducible IRA accounts.

Congratulations on your upcoming marriage and the awesome financial start!

Lars:

Awesome advice Jim, thanks for the attention. Love your idea about living off the dividends.

Clarifying question: would you invest the $75k in VTSAX in one lump purchase, or would you space it out somehow using dollar cost averaging? If so, is there a DCA time-segment strategy you would use in our case? (i.e. $5k every month for 15 months).

jlcollinsnh:

purse overflowing

Glad you like the living off the dividends idea, Lars. That’s what I’d do personally and it is what will get you to financial freedom fastest.

As for DCA (dollar cost averaging), I am not a fan. For three reasons:

1. It messes with your allocation. Initially with DCA you are way too cash heavy and then over time the balence shifts. Better to simply decide what allocation works best for your situation and then implement and maintain it.

2. You have a 50% chance of it working against you. If the market rises while you are DCA you’ll be paying progressively more for your shares. Of course, it could work the other way and by choosing DCA you are betting it will. So basically you are predicting the direction of the market in the short-term. That’s market timing and market timing is a loser’s game.

3. Since you are in the wealth building stage, as you invest new money over the months and years you are in fact stuck with a de facto DCA situation. This one you can’t avoid, but no sense adding to it with your cash on hand.

Make sense?

Lars:

I’ve never heard that reasoning against DCA, but it helps me feel better about dumping the money into VTSAX as a lump sum. It’s basically a bet that the index will be higher in 20-30 years than it is now. I’ll take that bet.

Thanks A TON for your help.

jlcollinsnh:

Yeah, DCA is one of those popular things designed to make people feel more comfortable without fully understanding the implications. This might help: Investing in a Raging Bull

It is far better in my view to take a little time to understand the market and how it really works.

Addendum #1: For more on luck and good fortune….

You make your own luck by JD Roth

What poker, basketball and Mike Whitaker taught me about luck

More Case Studies

Posted in Case Studies | 12 Responses

Case Study #8: Ron’s mother – she’s doin’ all right!

Yesterday I got a call from a good friend from whom I haven’t heard in a while. He’s a fan of the blog and, after a bit, he gently chided me for the infrequency of posts lately. It is always nice for a writer to hear readers complaining that there should be more.

Of course, I had many excuses. Other projects (some involving the blog!), re-certifying with the IRS and VITA, disappearing to Latin America and generally goofing off.

goofing off royalty-free-office-clipart-illustration-37094

But one of the more legitimate reasons is that as the blog has grown, so have the comments and questions. I’m grateful to receive them, but I’m also finding that much of the time and energy I have for writing here gets absorbed in responding. Not a complaint, but an observation. And a reminder, as I’ve said before, some of the best material to be found here is in the comments.

A while back I created this new section: Ask jlcollinsnh. There is fresh stuff up there almost every day now. So, if you haven’t already and are looking for more jlcollinsnh to read, check it out.

It is also a fine source for my Case Studies Series (see “categories” in the sidebar) including today’s.

This recent question appeared there and especially appealed to me. Ron’s mom, at 73, is certainly not an early retiree. In fact she didn’t even choose to retire. After 35 years her firm kicked her to the curb, with a lousy 12 week severance no less. It can happen to anybody. It has happened to me.

Fortunately, she was financially prepared and as it says in the song, she’s doin’ all right.

Her son writes:

Hi Jim,

My mother is 73.5 years old and was just terminated after a 35 year career as a legal secretary in Manhattan. She has saved pretty well and I just want to throw some numbers at you to see what you think.

She has 491K in a traditional 401K from her job. My brother has been managing those investments fairly conservatively within the plans offered and he made an 11% return last year.

She has 225K in a traditional IRA and her friend’s son has been managing the money and charging her .75% annually. He did not do as well and probably lost 1 or 2% on top of his fees last year.

He is also managing about 61K in a Roth for her as well. He is a bit of a pessimist and has her in gold among other hedge type investments.

Her expenses have been about $3K per month although that may rise with extra time on her hands. She has a pension of $900 per month and collects $1600 per month from social security.

She owns her coop apartment outright. She has 12 weeks severance and can then collect unemployment. She will now be responsible for her own health insurance.

How would you invest this money to keep it safe and make it last another 20 years?

Thanks so much,

Ron

My reply:

Hi Ron, and welcome!

To start off, your mother is in excellent financial shape.

weight-training-for-women

Her annual expenses are 36k. She has 30k in income from her pension and SS, and 777k in invested assets. Using the 4% guideline these assets can provide another 31k, for a total of 61k in potential annual income. Far more than it seems she needs, even if she were to dramatically increase her spending by, say, 33% to 4k per month.

Using VTSAX as a benchmark, let’s first look at how her managers did. This is the total stock market index fund and it returned ~33% in 2013. Of course, 100% stocks is way too aggressive for your mother, but it is a useful point of reference.

  • Your bother’s 11% return suggests to me he is managing your mother’s assets very, very conservatively, likely with a heavy bond concentration.
  • Your friend’s son, based on your comment and his negative 1-2% return in last year’s raging bull, suggests he is investing for Armageddon. A very poor strategy should Armageddon fail to arrive.

If you haven’t already, please take a moment to read “The Wealth Preservation and Building Portfolio” which is the second half of this post: Stocks –Part VI: Portfolio Ideas to Build and Keep Your Wealth.

In it you’ll find my reasons for the funds I’m going to suggest. You’ll also notice my suggested allocation percentages for your mother are much more conservative than those suggested in that post. My sense is you and she will sleep better, and with her assets she doesn’t need to pursue performance.

This is what I’d do were she my mother:

389k/50% VBTLX -bonds – current yield 2.2% = $8558 annual income
194k/25% VTSAX -stocks –  current yield 1.8% = $3492 annual income
194k/25% VGSLX -REITS – current yield 4.2% = $8148 annual income

Total annual income of $20,198, without touching principle.

This also represents a very conservative 2.5% withdrawal rate on her 777k. In addition, she’ll have bonds as a deflation hedge and real estate as an inflation hedge. If we do have a financial Armageddon, it will likely take one of those two forms.

This boosts her annual income from 36k to 50k, a 39% increase. With only a 2.5% withdrawal rate her portfolio will also continue to grow, likely leaving a substantial legacy for her heirs.

Hope this helps!

Ron’s reply:

Thanks so much Jim. My brother has read your response and is on board. We are firing the financial adviser and opening up new Vanguard accounts.

 More Case Studies

Posted in Case Studies | 15 Responses

roundup: Some random cool things

motorbike

It’s Better in the Wind

Guest posts I’ve done lately:

Retire Early Lifestyle: Esperando un Camino and Why Your House is a Terrible Investment

And an interview: A man with F-you money

How Warren Buffett got his start. 

How state taxes influence where people choose to live.

Crazy House in Vietnam

Strange Houses

Cliffs of Dover

Cliffs of Dover

scientific_facts_02

29 more scientific facts

old-cigarette-ads-4

Old cigarette ads

serpent docean loire nantes Huang Yong Ping  7

Giant Serpent off the coast of France

 

thor harris

How to live like a king for very little

 

little girl as flemmish painting
Looks like an old Flemish painting, right?
Spain somewhere
This is somewhere in Spain. Anyone know where? I don’t.
mars
This is sunrise somewhere on Mars
sea stack
Posted in Random cool things that catch my eye | 14 Responses

Stocks — Part XXI: Investing With Vanguard For Europeans

girl-shrugging-shoulders

Who knew?

Certainly not I.

This all started when I wrote a series of letters to my daughter about financial stuff I felt was important for her to understand. Stuff she wasn’t yet ready to or interested in hearing. (I’m still waiting, Sweetie.)

I mentioned this to a couple of friends and, at their request, shared the letters. They encouraged me to put them on a “blog” as “posts” so my family and the rest of my friends might read it. And so they could more easily pass it on to theirs. One of them pointed me to WordPress.

I simply never dreamed an audience would develop beyond my little circle of friends and family. That’s not false modesty. I quite literally had no idea blogs could or did have larger readerships.

When I started this one, I barely knew what a blog was. In fact, the first blog post I ever read was my own. Then I began reading James Altucher, one of the first people to encourage me on this path. It was probably six months or so later before I stumbled on ERE. And then MMM. And then, and then, and then…

So as you might imagine, it really rather stunned me to see jlcollinsnh develop an international readership. Boy howdy! Given my love of travel, this remains quite the thrill.  I first noticed it about ten months in and shared my discovery with the post Where in the World are You.

So far this month, there have been 85,706 page views and of those, fully 12,006 are outside the USA. Collectively, the countries of Europe are the second largest market.

But for these readers, the information here tended to come up short. The problem is, the investment tools we have so easily available here in the USA are either very costly or simply unavailable to the rest of the world. And since I know nothing about the specifics of what is available in the rest of the world, other than the core principles of investing described in this Stock Series, there was little here to help.

Not to say I didn’t try. The second half of the post What if you can’t buy Vanguard addresses it a bit. And I am very pleased to see the comments section of that post has become a sort of Forum where my international readers have posted their own experiences and questions.

Fortunately, Mrs. EconoWiser of the Netherlands is here to help. As you might guess from the name of her blog, she writes about living and spending efficiently. But around about March of last year she began reading jlcollinsnh. And she noticed the woeful lack of specific guidance as to how to implement the ideas here. But rather than throw up her hands, she set about figuring it out.

She’s done a brilliant job and, if her name sounds familiar, it might just be because I’ve had the frequent occasion to link to several of her posts in helping my European readers. Her research and insights are that impressive. So much so, in fact, I’ve come to think of EconoWiser as the European division of jlcollinsnh International. Egotistical and presumptuous on my part perhaps, but there you have it.

With all this in mind, about a month ago I asked her to write this guest post summarizing her low-cost index investing strategies for Europeans.

If you live in Europe, this is a must read.

If you live in another part of the world, maybe it will inspire you to follow her lead and figure it out for where you are. (And I’ll have another guest poster!)

If you live here in the USA, read it and appreciate just how easy and inexpensive the options we have here are.

But wherever in the world you are: Enjoy!….

econowiserheader2

It’s an honour to write a guest post for this wonderful blog. My “uncle J.”, as I like to affectionately call him, has taught me so many things about life and index investing. As a newbie on the index investing topic I decided to check out how this works for Europeans. As I’m a Dutchie myself, I was eager to find out how to make this index investing miracle work for the Dutch and consequently my fellow Europeans. This post will provide a rather general overview of my findings so far.

The Strategy

You should be familiar with J’s strategy if you’ve read the stock series on this magnificent blog. (If you haven’t, you should read the series first and read this blog post afterwards) A summary:

  1. If you can do business with Vanguard, do so as they are the only investment company out there that puts the interests of their customers first
  2. Buy broad-based index funds
  3. Costs matter hugely
  4. Keep it simple

And I’ve got some good news for you: we can apply the jlcollinsnh index investing strategy in Europe as well! Yay!

Investing With Vanguard In Euros

Unfortunately, you can’t open an account with Vanguard in Europe as a private investor. Unless you have €500,000 ready to invest (in which case: well done you!), you’ll have to go through a broker. Yes, let’s envy the American index investors who are able to open an account with Vanguard directly for a moment here and then let it go.

Vanguard Europe currently holds offices in seven European countries. You can contact your Vanguard office in: Denmark, France, Germany, The Netherlands, Sweden, Switzerland and the United Kingdom.  Staff are very friendly and helpful, you can ask all sorts of questions about their products. However, they won’t give you investment advice. If Vanguard doesn’t hold an office in your country I suggest you go to the Vanguard global portal and click on the United Kingdom. Click on individual investors and then exchange-traded funds or mutual funds (I will explain the difference shortly). You will find all the information you’ll need.  I am referring to the British Vanguard website ,even though all European Vanguard website content is in English.

Disclaimer: please bear in mind that when investing with Vanguard Europe you are NOT investing with the American cooperative non-profit organisation. Vanguard Europe is an independent subsidiary. In my humble opinion their philosophy matches the American parent company exactly. However, it is not a cooperative non-profit organisation in and of itself.

eurotoiletpaper

Let’s do something useful with our euros instead. http://www.megagadgets.nl/en/euro-toilet-papier.html

Vanguard Mutual Funds Vs. Vanguard ETFs

First things first, you need to decide whether you want to invest in mutual funds or ETFs (Exchange Traded Funds). In this article I will assume that you want to invest in Vanguard ETFs. The reason for my assumption is that ETFs are index funds that trade on the major stock exchanges and are traded like stocks. Mutual funds might be a bit more difficult to buy for some Europeans. Vanguard ETFs have lower expense ratios compared to the Vanguard mutual funds. They can be bought and sold throughout the day instead of once a day at closing prices. As we do not have IRAs or 401(k) plans to take into consideration, ETFs are a great option for European investors. ETFs pay out all dividends which you will need to reinvest yourself, whereas a mutual fund automatically reinvests the dividend for you. However, transaction costs might be lower for mutual funds if you can obtain these through a broker specialised in index investing.

An overview:

Vanguard Mutual Funds Vanguard ETFs
Higher total expense ratio Lower total expense ratio
Can be bought and sold once a day at closing prices Can be bought and sold throughout the day like regular stocks
Might be a bit more difficult to buy Accessible to all Europeans
Option to automatically reinvest dividend Dividend is paid out, which you might want to reinvest yourself
Transaction costs might be lower through a broker specialized in index investing Regular broker fees apply, however there are cheap ones out there
Very interesting for smaller amounts of money on a monthly basis due to brokerage commissions (if available) The higher the amount you want to invest, the more interesting concerning brokerage commissions, great for lump sums

In this blog post I’ll focus on stocks-only. The same strategy applies to bonds (and REITs if you’re investing in dollars).

Here’s the Vanguard ETF selection you, as a European, are able to choose from:

Vanguard exchange-traded funds TER Available currencies ISIN
Vanguard FTSE All-World UCITS ETF 0.25% USD/GBP/EUR/CHF IE00B3RBWM25
Vanguard FTSE All-World High Dividend Yield UCITS ETF 0.29% USD/GBP/EUR/CHF IE00B8GKDB10
Vanguard FTSE Dev. Asia Pac. Ex Japan ETF 0.22% USD/GBP/EUR/CHF IE00B9F5YL18
Vanguard FTSE Developed Europe UCITS ETF 0.15% GBP/EUR/CHF IE00B945VV12
Vanguard FTSE Emerging Markets ETF 0.29% USD/GBP/EUR/CHF IE00B3VVMM84
Vanguard FTSE Japan UCITS ETF 0.19% USD/GBP/EUR/CHF IE00B95PGT31
Vanguard S&P500 ETF 0.09% USD/GBP/EUR/CHF IE00B3XXRP09
Vanguard FTSE 100 UCITS ETF 0.10% GBP IE00B810Q511
Vanguard Government Bond UCITS ETF 0.12% GBP IE00B42WWV65

All hyperlinks link to U.K. factsheets. However, the facts are similar for all European countries (even if there isn’t a Vanguard office in your country).

Obviously, we’re investing in a European currency here. I will discuss investing with dollars later on in this article.

Buy Broad Based Index Funds

If you check out the different prospectuses you’ll quickly come to realise that there’s a one-stop shopping option for all your diversification needs. That would be the Vanguard FTSE All-World ETF at 0.25% TER. Through this fund you’re investing in 2,900 holdings in nearly 47 countries, including both developed and emerging markets. The fund covers more than 90% of the global investable market capitalisation. This way there’s no need to mix U.S., European and emerging markets yourself as the fund has already done this for you. Unfortunately, it doesn’t include small cap. I’m not telling you what to invest in here, do whatever floats your (Vanguard) boat.

FloatingBoat

Floating boat. Not photo shopped, the water in Greece is just that clear. http://www.mymodernmet.com/profiles/blogs/magical-boat-floating-on-water

Here’s the lowdown on the fund:

Vanguard FTSE All-World UCITS ETF
ISIN IE00B3RBWM25
Greater Europe 27.36%
Greater America 52.25%
Greater Asia 20.39%
TER 0.25%

Find a broker – costs matter hugely

Now that you’ve checked out the different options in mutual funds and ETFs you’re going to find yourself a broker. You’ll need to invest a couple of hours of your time to find out which one suits your needs best. Google is your friend. Obviously, costs are very important. In The Netherlands we have many wonderful online brokers now, which offer accounts at rock bottom costs and will only charge transaction fees. Check out and compare transaction fees, custody fees, membership fees, and service fees. If you’re not charged for opening an account, why not open several accounts with different brokers so that you can also check out their interface and what not? Oh, and phone them. Ask them lots and lots of questions.

Before We KISS, There’s The Tax Thing

There’s this thing called the dividend leakage, and it’s a pain in the backside for investors. Unfortunately, it’s a significant cost for investors. As most of the European Vanguard funds are domiciled in Ireland you need to be aware of the Irish double taxation agreement. A (non-Irish) European investor is charged dividend withholding tax by the Irish government. Whereas the Irish investor can claim this dividend withholding tax back from their government, the rest of us (in most cases) can’t. You can ask your national tax department on your country’s dividend tax treaty with Ireland. The EU does not approve of this tax, but there is nothing you can do about it. You might want to check out investing with Vanguard in dollars. Hey, what a coincidence. I’ll go through that option in a minute. If not, you’re just going to have to suck this one up.

Let’s Keep It Simple, Sweetheart!

If you follow these steps you will have identified which fund(s) you are willing to throw your cash at (on a monthly basis?), have found the best and cheapest broker because costs matter hugely and you will have accepted the fact that there is a dividend leakage (or have tried to work your way around it…or have given up on investing after all…don’t!).

Yes, but…what about the dollar version? Oh, so you don’t want to KISS just yet? Okay, here we go!

Kiss-001

No thanks. http://www.theguardian.com/music/2011/aug/16/michael-jackson-kiss-tribute-concert

Investing With Vanguard In Dollars

Again, you want to buy broad based index funds. Of the many Vanguard funds you will be able to choose from through your broker (which we’ll select later on) I chose two different options to illustrate how to go about investing with Vanguard in dollars. You can also buy bonds and REITs through your broker specialised in international stocks. However, for simplicity’s sake I’m referring to stocks-only here. Oh, and make sure you check out Morningstar when comparing funds.

Vanguard Total Stock Market ETF Vanguard Total World Stock Index ETF
Ticker VTI VT
ISIN US9229087690 US9220427424
U.S. 98.35% 53.38%
Greater Europe 1.56% 26.63%
Greater Asia 0.10% 19.99%
Amount of stocks 3609 5109
TER 0.05% 0.18%

Option number one is the Vanguard Total Stock Market ETF, which is as close to J’s favoured VTSAX as we can get. However, as a European investor you’d be investing almost entirely in U.S. stocks. Option number two is the Vanguard Total World Stock Index ETF. This will give you a one-stop shopping experience and all the diversification you’ll need over all markets.  (Also recommended by Malkiel and Ellis in The Elements Of Investing, p. 122)

Again, Find Your Broker

You’ll want to do another research on finding the best and cheapest broker for your dollar stocks. It could just so happen that the best and cheapest broker for your transactions in euros does not fit the requirements for your dollar transactions. Google is your friend, once again. Check out and compare transaction fees, currency exchange fees (very important in this case!), custody fees, membership fees, and service fees. You also want to inquire after the broker’s custodian, which might not find itself in your home country. This shouldn’t be a problem, you just want to know where your stocks are if ever you need to reclaim them if your broker goes bankrupt.

rich guy Bankrupt

Will LTC Bankrupt the Nation?

 Not Another Tax Thingy?!

Yep, another tax thingy. See, the U.S. government will charge up to 30% dividend withholding tax. However, that depends on your country’s dividend tax treaty with the U.S. My country has a cool deal with the U.S. and thus my dividends will be charged with a 15% withholding tax instead of 30%. The remaining 15% withholding tax can be reclaimed by filling in a W-8BEN form. You should renew this every three years. If you’ve found yourself a broker specialised in investing in dollars, they’ll probably know how to handle this. Ask them about the form. My broker will automatically send me a new form every three years which I can sign online. No biggie. You could also contact your national tax department in order to require after the rules that apply to your specific situation.

Currency Risk

You probably guessed that you’ll need dollars in order to invest in dollars. It’s important that you find a broker who will exchange your euros for dollars at rock bottom costs. However, you also need to bear currency risk in mind. As you live in Europe, you’ll probably want to cash out in euros someday. If the dollar has devaluated strongly against the euro  at that point in time, you might be disappointed. Consequently, if the dollar thrives and the euro doesn’t, you could be in for a windfall. Who knows? Maybe it’s also not all bad news when thinking about long-term investors. Come to think of it, when investing in euros your cash is also transferred into dollars but you just don’t see that happening. The base currency of the index will be in dollars anyway. Investing in euros in international stocks does not totally protect you against currency risk either.

Scary stuff, right? Now, there’s a way to sort of insure yourself against this currency risk. It’s called hedging, it doesn’t come cheap (that’s an understatement) and my guess is uncle J. probably won’t be a huge fan either. It sort of comes down to you adding euros to your brokerage account. Instead of transferring your euros into dollars, you’re borrowing dollars against a certain rate. You’d then be paying interest on that loan. As we’re long-term investors this would destroy our profits. So let’s just forget about it. I’ve mentioned it, and that’s that.

Currency-balancing-act-150x150

http://www.colordarcy.com/wordpress/currency-risk-%E2%80%93-should-property-investors-worry/1919/

KISS

Now that you have investigated the different options for investing with Vanguard in euros and dollars you can make your own risk analysis. Take into account things such as currency risk, costs, dividend leakage and broker bankruptcy risk (custodian is important here). Choose your strategy and stay the course for the next thirty odd years or so.

moneypuzzle-370x229

You’ve solved the index investing in euros puzzle! http://www.financialdirector.co.uk/financial-director/research/2201152/rel-working-capital-survey-2012

dollar-puzzle-300x225

Or the dollar version! http://www.bestsmallbizhelp.com/2011/08/small-business-funding-tips-borrowing-from-banks/dollar-puzzle/

Good luck!

Love,

Mrs EconoWiser

Disclaimer: I am not a professional investor or financial adviser nor do I claim to be one. You are solely responsible for your own financial investment choices. I am not responsible for inaccurate information in this blog post. I am merely sharing ideas and findings of my very amateurish investigation in index investing for Europeans.

Addendum: Want to translate this blog from English to another language? Google Translate makes it easy. Just click on the link, type in jlcollinsnh.com and choose the language you prefer. Click on the link for that language and you’re done!

NOTE:

Be sure to read the comments to this post. There is a wealth of additional information in them. My thanks to those who have contributed!

Posted in Guest Posts, Money, Stock Investing Series | 53 Responses

Case Study #7: What it looks like when everything financial goes wrong

walking the dog

A couple of months back I was walking the dog on a beautiful Fall afternoon. As I sat on a bench enjoying the sun it occurred to me it had been a very long time since I had spoken with my pal Tom.

As I dialed, I really didn’t expect to reach him. Seems while we all have phones with us every moment of every day we never actually answer them. At least I am hard pressed to recall the last time I didn’t wind up in voice mail.

But answer Tom did, barking his last name into the phone by way of greeting and sounding every bit the crusty Marine he once (and by Marine standards still) is. I had forgotten this answering style of his and, were I not as manly as I am, I might have dropped the phone in terror.

Tom’s an interesting fellow. A hard living gun collecting Catholic life long liberal Democrat Marine. A man of faith. He’s a tough guy in the best sense of the term, relentlessly cheerful and there’s not a complainypants bone in his body, as you’ll see. He was a former customer of mine back in the mid-1990s and we’ve been friends ever since. I like my friends eclectic.

Now in his mid-sixties Tom’s had a robust life, filled to the brim with experiences. He’s the kind of guy who, like me, sometimes feels the need to tell people in power to go f-themselves. Unlike me, Tom’s willing to do it without having F-you Money. Working without a net you might say.

Catching up together he told me he had just lost his house to foreclosure, gone thru bankruptcy and almost lost his treasured antique gun collection to the court before scraping together the cash to buy it back. He was laughing while he told me all this. That’s Tom. But the fact that he was also in the process of moving in with his gorgeous Swedish girl friend probably didn’t hurt.

As we talked about all this, I decided his was a story worth sharing. Gracious as always, he agreed and here it is unedited except for adding some illustrations, a bit of name disguising and formatting.

Marine flip

Even a Marine can get thrown…

Tom’s story:

1947 to 1969 -

Lived at home with my brother; children of two, strict Catholic, children of the Depression – to say we were repressed is probably an understatement.

We were both taught to save … I started to work at 13, in a retreat house refectory. I saved every dime in a local savings and loan … it was cool to watch the deposits build up little by little.

I went to a Catholic grade school and an all boys Catholic high school. Both cost money.

In 1965 I started at Wayne State University. I had some help from my folks, but paid for books, transportation, lunches, etc myself. I lived at home and commuted.

I worked every summer as well stashing money away for the next school year. I dated, hung with friends and had an active fun college experience even though it wasn’t at the ivy covered walls of a major university away from home. I thought it, at the time, to be, well, normal.

In 1968 I bought my dad’s used 1965 VW for $500. I finally had “wheels.” When I graduated, I had $2000 in that savings and loan.

In June, I graduated, In August I got married to my little Irish lass, MA. In September I reported to active duty at the Basic School, USMC Training Center in Quantico, VA. Life was good and I was finally on my own.

1969 to 1992 – The “MA” years -

After living that restrictive, home all the time, life with my parents, I was free at last and MA was pregnant. I was going to be a father.

I started to want things my parents would never let me have. A brand new Pioneer sound center complete with amp, turn-table, reel-to-reel, cassette player, top-of-the-line speakers, etc. Found an old oak roll-top desk I liked for $300. etc.

The two grand melted away; but I was an officer in the Marine Corps. I had a regular paycheck of $5,000/year. Saving some how didn’t seem too critical, retirement was 20, 30, 40 years away. I may not live that long.

Pretty soon we had two daughters and we were living paycheck to paycheck. Credit was easy to get and easier to use. We started to build up a little debt, not much, but a grand or two. didn’t seem like any big deal.

Got out of the Corps in 1973, got a great job with M-corp for $12,000/yr. Two grand more than I made as a 1st Lt in 1972 (oh, in 1972 B was born too – I now had two wonderful daughters). Wow, I had this great job back home and I bought a house in Detroit for $20,000.

Did a fine job at work and in 1976 got promoted to Field Development Manager. (wasn’t sure about leaving our friends, family, etc. Went to Chicago, went to mass at the Cathedral one Sunday and prayed to the Lord to ask if this was right for my young family. The usher interrupted my prayer and tapped me on the shoulder and asked if my wife and I would take the offering up at the Offertory. I took that as a sign, as a “Yes.”

Took the promotion and moved to Chicago … still had a little debt … couldn’t seem to pay those damn cards off completely every month. Sold the house in Detroit for $18,000 (learned to buy high and sell low).

Did sign up for payroll savings. Our new old house in Naperville, IL cost twice as much a month as our house in Detroit, $40,000. Mortgage payment was twice as much, and obviously I wasn’t earning twice as much … had to commute into the loop every day. Still, it was a great community, right in the old part of town.

keeping-up-with-the-joneses-20081

Still, costs were increasing while income wasn’t keep pace. Had kids to raise, had to “keep up” after work, in the neighborhood, etc. Think my payroll savings were about 5% of my income, maybe 6%. Wife decides to go back to school. Had my first college education to pay for.

1979 or 80, I left M-corp to work for V-corp (as Office Manager), visual techniques, a slide presentation house in Chicago with customers like McDonalds, etc., for like $35,000, more than $10,000 more than I was making at M-corp. Sounded like a good deal … I took it; except it only lasted for a year … my first set back.

Conflict with the two owners, they didn’t like the direction I was taking the office. I scrambled and M-corp took me back. They were more faithful to me than I was to them. Still, they knew I was talented and hard-working. I was now the Advertising/Sales Promotion Manager at $27,500. They even bridged my time so I didn’t lose my ability for vesting.

In 1983, a couple of months short of my 10th anniversary at M-corp (and vesting), I was pursued and wooed by R-corp in Bridgeport, CT. They treated me like a king, MA and I loved the area, the job was a new challenge, seemed like the right thing to do.

I even had another sign from God that it was the right move. A rainbow this time.

rainbow

Courtesy of http: hdwallpaperia.com

Sold the house in Naperville for $60,000. Off to New England in 1982. Bought a house for $85,000 in Newtown, CT, used the $20 grand as the down payment. Loved it.

Job lasted two & 1/2 years, R-corp went bankrupt due to asbestos litigation. Bummer. Still, that year (1984) I got a call from a friend who worked at RR-corp. He wanted to know if I’d like to talk to a recruiter in New York about an opening as a VP at RR working on the C-corp business. I said sure. In 1984 we headed back to Detroit.

Bought a home in upscale Birmingham, MI for $120,000. Wife now had a job at DT-corp as an auditor. RR helped get her transferred to Detroit as well. We were on our way.

Two jobs, nearly $90,000/yr. Wow! Things went well, girls graduated high school, went on to MSU, now had two college educations to pay for, work was hard, wife and I hardly saw each other, etc. In 1987, my dad died; in 1989, my mom died.

In 1990 MA asks for a divorce. What? She said I was mad all the time (maybe I was just sad). Didn’t know what I was I guess, except i didn’t want the divorce, like a man has any say in that. Anyway, after the dust cleared I still had a job, had to sell the house, didn’t get much more than we paid for it (those were recessive years), and I walked away with about $24,000 left in my personal nest egg after she took her half, we paid the lawyers, etc..

I put the money left in 4 diverse money market funds and let ‘em alone. In 1990 I met A at work. 23 years my junior. She loved me, I rented a house in B’ham and she moved in. We had a ball. Life was good again.

In 1990, RR took me off C-corp (where I was happy) and put me on new business because I was “so good at it.” I hated it. In 1991 I asked for some time off, I was burned out and I wanted back on C-corp. They said “no,” I said I quit. A and I loaded up a ’89 Jeep Cherokee and set off to see the back roads of America. We traveled all of 1992, camping and back-packing. I do it all again.

Jeep_Cherokee_Chief_For_Sale_Rear_1

1992 to 2006 – The “A” years -

a new young lady, a mate for the rest of my life. That’s what I thought. The year off taught us a lot about each other, we loved each other, we knew we’d make it. No job, but who cared, we’d find something, and finally in 1993, we did.

By then A was pregnant with our first son, A, I found a job with an old buddy rep-ing auto parts and pickup truck bed-liners in Baltimore. We bought an end row townhouse in Towson, MD, and settled in. G was born  and all seemed well, until my boss said he couldn’t afford me and my $30,000/yr salary anymore.

No problem, I found a new job at a little ad agency in Winchester, VA. Sold the house in MD and rented one in VA. Good move, because that $40,000/yr job only lasted a year.

Did I mention, I had to cash in my money market funds one at a time between 1992 and 1996 to survive, for down payments, etc.?

It’s now, 1995, I find a great new job in Ohio at  U-corp calling on an old RR client, FM-corp.  I knew this was going to last, so I bought a nice house in Cuyahoga Falls. And, oh yes, Z, my second son was born there. happy we were … until 1997 (P.S. I’m 50 now and starting to worry about retirement;-).

I couldn’t stand my boss and the owner of U-corp anymore. I started looking again. Thank the Lord, I earned a $20,000 bonus in 1996. Money in the bank … paid off credit cards, etc.

Guess who wanted me back in Detroit. Good old RR. Off we go, one more time. Motown here we come. Back on C-corp, back with our friends (A’s and mine), happy we are … we buy a house in 1998 in Milford! Wow, my home from 1998 until 2013. Longest place I ever lived continuously. Used what was left of the U-corp bonus as the down payment.

Everybody was making money and life was good. I got back to the ad agency grind and A stayed at home and raised the boys … until 2002 or so when she starts back to college at Eastern … another college education … no problem, we’ll just refinance, the house is appreciating.

A buddy of mine from BB-corp becomes President at YR-corp and he wants me to join his team as a VP … an honor and more money. Off I go to YR, well that lasts two years until he gets canned and of course all “his people” get the ax too. Out of work in 2001. Takes me almost a year to find a new job.

When I left BB and went over to YR, following my buddy M who became CEO of the Detroit office, I took around $40,000 in 401K money. In 2 years or so I managed to add another $50 or $60K. On M’s advise, I invested that $$$ with a money manager for one of the big investment companies. In a couple of years he lost about $80,000 of my money. That hurt. He kept telling me it was just a blip in the market, it would come back (e-boom and bust time period). Anyway, easy come, easy go;-) (jlcollinsnh: another reason I don’t like money managers)

Losing_Money-300x225

80Gs down the drain. Thanks for the professional advice.

Spent money I had set away for retirement. Now 55 with a young wife, two sons and no nest egg. Guess where my new position is? back at BB, but this time as a lowly Account Supervisor. I am being punished.

They put me on the C-corp business. I work hard and help build the business. They finally promote me to VP again in 2003. Making $80,000/year, $1,400/year mortgage, helping A through school. She graduates in 2006 and guess what … she files for divorce. takes half of what I have in my 401K, I think the house is appreciating, I keep that, buy her out of her half. Pay lawyers, etc. Child support … life gets kinda sucky.

To make things worse, in 2008, the bubble bursts, I’m screwed, C-corp goes bankrupt, fires all their vendors, sticks everybody with debt and now I’m 61 and no one wants or needs a 61-year-old account man. I’m saddled with debt, get deeper in debt, house depreciates, can’t sell it.

I hang in with part-time jobs, Michigan State Unemployment Insurance until 2012 when the answer hits the proud old Marine officer … I have to file for Chapter 7.

I take my SS at 62, since I can’t wait until 65. I collect a small VA benefit of $132/month for hearing loss during my USMC years. I also have a $400/month pension from RR.

The C years -

farm henry-ford-museum[1]

I find the Swede, fall in love again, find a part-time job at a museum and historical farm as a historical presenter working on the farm and life is good again. Since I don’t have $$$, I have learned not to worry about it.

I have my health (and VA Health Benefits), great friends and relatives, wonderful kids and grandkids, a job I love that gets me outside and provides plenty of exercise, a roof over my head and a woman who loves me. What else do I need?

I make about $2,500/month with my PT job, my VA benefit, my RR pension and my Social Security. I’m a lucky guy.

Here are the numbers:

Pension  – $ 400

Social Security               – $1500

VA Compensation          – $ 132

Part Time Job                 – $ 500 + or – (some months $750 or more/some months [winter] $300 or less)

Total                                 $2500 or $2600 – average

jlcollinsnh’s take: 

What we have here is a talented guy with solid contacts and strong career performance who found himself without a chair when the music stopped and he was past the age employers prefer. Add in a couple of expensive divorces, multiple kids, a disastrous run with a money manager, the implosion of 2008 and growing debt and you have a guy reaching the finish line just as his financial world collapses around him. It’s enough to drive a man to drink.

Or not.

Where in many such a run would trigger an intense wallow in the complainypants mud pit, in Tom it simply rolls off his shoulders as he cheerfully moves on. Tom knows he has what is truly important in life: “…my health, great friends and relatives, wonderful kids and grandkids, a job I love that gets me outside and provides plenty of exercise, a roof over my head and a woman who loves me.”

My guess is he has all those things because of his attitude. Tom’s a guy you want around. As a friend, as an employee and, at least in the case of the beautiful Swede, as a lover.

He’s had a full and varied life. A life that accumulated a little pension, a bit of VA comp and SS. Along the way, he’s learned that stuff just ain’t that important. And once you no longer value stuff, the good life just ain’t that pricy.

Something to think about the next time you are worried about the 4% rule working out or having gotten a late start on retirement planning. By all means plan, save and invest for your future. But keep in mind mental toughness, the ability to roll with the punches and lifestyle flexibility are where true security lies.

 Addendum 1:

While I didn’t think about it as I prepared this post, several readers commented below how financially damaging home ownership proved to be in this story. A real life illustration as to Why your House is a Terrible Investment.

Addendum 2:

thor harris

How to live like a king for very little

Addendum 3: From the comments below…

Deacon:

Great story and some very worthwhile advice from all involved. I love the points about living with less and focusing on relationships over “stuff”. I’m also amazed by Tom’s ability to live such a mobile life with a family in tow. Hard to do that with lots of unnecessary possessions on hand. Reminds me of the wisdom in one of David Cain’s recent posts on raptitude.com (“Everything In It ‘s Place, Now and Forever.” )

So as not to armchair quarterback Tom’s decisions in an effort to apply lessons to my own life, I’d love to hear what advice he has based on his story. Above and beyond his very wise comment about the value of relationships over material desires, that is. With all the forks in the road that he faced, I’m sure he developed at least an unconscious list of rules to live by that have helped him maintain such a positive outlook and ability to attract quality people in his life. I say this based on both his successes and his failures, as lessons obviously can be learned from both.

Tom:

Hey, Tom here. In response to Deacon’s request, I have a few rules I live by …

#1. Seek the truth; there is a lot of deception in the world. Learn to find out what is true and what is false. It takes some effort, but it’s worth it.

#2. Get outside everyday and breathe fresh air, get some exercise, even if it’s just a nice long walk.

#3. Look everyone in the eyes when you talk to them; it will instill trust in both parties and you will learn to read others’ responses.

#4. Tell the ones you love (family and partner) that you love them.

#5. Simplify, simplify … Thoreau was right. We sure can’t take all this stuff with us.

#6. Work at a job you love and put your all into your work. That being said, don’t take your work home with you. Take time to unwind.

#7. Eat healthy, have a drink daily, but don’t overdo either.

#8. Be thankful for the things money can’t buy.

#9. If you have kids, take them fishing, camping, whatever. Show them there is another world out there that has nothing to do with electronics or stuff.

#10. Take the back roads in life, stay off the freeways.

More Case Studies

Posted in Case Studies | 56 Responses

1st Annual Louis Rukeyser Memorial Market Prediction Contest 2013 results, and my forecast for 2014

Rukeyser

Louis Rukeyser

 Well now, this is a bit embarrassing.

Early last year I published a bit of satire titled How to be a Stock Market Guru and get on MSNBC. Basically I mocked the idea that anyone can predict the short-term market and laughed at those who claim they can. Just as one of my financial heroes, Louis Rukeyser, used to do on his weekly TV program Wall Street Week.

Every January Rukeyser would have each of his guests predict the market’s high, low and close for the year.  I forget his exact line, but after the predictions were in he’d say something like, “…with the understanding that even these exalted experts could be wrong, there you have it.”  And he’d wink knowingly into the camera.

Come the following December he’d salute those who’d come closest and chide the goats.

In that post, in his honor and in his lighthearted spirit I decided to do the same, introducing the jlcolllinsnh.com 1st Annual Louis Rukeyser Memorial Market Prediction Contest. 

Then, after all this emphasizing of how silly such predictions are, I went and won the damn thing myself. At least on the high and close picks. In fact, my prediction for the high, at 1825, was a scant 24 points/.013% off the actual high of 1849. Doesn’t get much more precise than that.

Now any talking head TV stock market guru who came anywhere close to my level of accuracy would be, modestly of course, loudly attributing it to their remarkable wisdom and bathing in the glory. All the while encouraging the belief that they’ll be able to reliably do it again and you should buy whatever it is they are selling. Most likely the fund they manage or the advice they offer.

Here at jlcollinsnh we strive to be a bit more honest. The truth is, very simply, I got lucky and there is no reason to think my predictions for 2014, provided for your entertainment below, will come anywhere close to duplicating those of 2013.

If there is value to be found on this blog, it isn’t in my short-term market prediction skills, “short-term market prediction skills” being an oxymoron and all. It is in, hopefully, providing some perspective on how the market tends to behave long-term and how to successfully invest in it for that long-term.

OK, enough of that. As promised last year let’s get on with saluting the winners and chiding the goats.

goats

Poor goats. Always on the edge.

We’ll start with me.

In that post last January my predictions for the S&P (which incidentally closed 2012 up around 13% at 1426) in 2013 were:

High: 1825
Low: 1312
Dec. 31st, 2013: 1754

The market actually posted these results:

High: 1849
Low: 1457
Dec. 31st, 2013: 1848

What’s interesting here is that the low was reached on January 8th, just five trading days into the year. The high was on December 31st. This reflects an increase of about 29.5% in a relentless and almost smoothly straight climb up. I certainly didn’t predict that. Nobody did.

Interestingly VTSAX, the fund I favor for wealth building, was up about 33% for the year. The reason it did better being it holds small cap stocks in addition to the large caps of the S&P 500. Small caps tend to outperform in bull markets and 2013 was certainly a bull. But before you rush out and switch to a small cap fund, be warned they tend to get crushed further in the Bears.

While my predicted close of 1754 fell short, it was still impressively close and good enough to also snag the #1 spot in this year’s contest.

My 1312 low was way too bearish and didn’t even finish in the top three.

So how did my participating readers do? There’s praise to be given and goats a-plenty:

Reader RW was the only person more bullish than I and came within a whisker of beating me with a predicted high of 1875. That’s only 26 point off; very impressive:

High 1875
Low 1300
Close 1525

Good call there on the high, RW. On the low and the close, not so much. ;)

RW offered no reasons for the numbers but instead said: “Good to see you back safe and sound. Thank God the Mayan’s got it wrong!” The first referred to my end of the year 2012 travels and the second to the widely touted alleged Mayan prediction the world would end in December 2012. Maybe they’d have done better predicting the market.

RobDiesel finished in the money on all three counts saying:
I sat down to polish my pecuniary crystal ball and came up with this.

We’ll touch 1801, won’t drop lower than 1422 and close out the year at 1653.

His high came in at #3, his low at #1 and his close at #2. I’d say that makes him our overall winner! Keep that ball polished Rob!

My pal Shilpan also did well, finishing in the money twice. He said:

I am also bullish on the market.

High: 1675
Low: 1403
Dec. 31st, 2013: 1630

His low was good for #2 and his close came in at an admittedly distant #3.

Mind = Blown was the third least bearish on the low at 1385 and that got a #3 finish. Not bad for what seemed to be a bit of a half-hearted participation:
Hey, just posting here because I have a question, but I’ll hazard a guess. I work in the DC area and we are all terrified of the fiscal cliff – not that most of us would actually lose our jobs, the government is too afraid to produce cuts that would hurt anyone – so I’m a bit pessimistic. My guesses hedge quite a bit on what happens, and I know that we’ll have another non deal that will make everyone happy for a little bit. So I’ll say we’ll hit a high of around 1600 when that deal hits, hit a low of about 1385, and close the year at about 1475. Not very much volatility, but I really have no idea what I’m doing, and am mostly going off last year, the recent jump, and random thoughts.

No worries M=B, when it comes to this market predicting stuff none of us really have any idea what we’re doing.

So bearish was Mortgage Mutilator only a number for the low was offered:

My prediction is either stagnate or a drop due to all the issues of the debt you guys have. I reckon this will prompt the government to pull out some new harsh policies that will slow everything down.

I predict about 1400 at the end of this year :-)

Opps. But, as we’ll see, not by far the biggest “opps”. Better luck this year, MM!

The Mad Fientist jumped in first asking:

What are the chances of someone from Vermont actually winning this thing??

High: 1616
Low: 1361
12/31/13: 1555

Well, with predictions like those MF, not much. ;)

Still, as I said in my introduction to his guest post, this is a guy worth listening to. Just not about where the stock market is going.

Estate attorney Prob8 is a regular commentator around here and has become our resident death-taxes-probate-estate planning resource. He even has a guest post on the subject. He said:
Here’s my 2013 guess:

Low: 1326
High: 1646
Close: 1540

My guess is we should listen to him about that death-taxes-probate-estate planning stuff. On the stock prediction stuff, not so much.
Good luck next time, Prob8!
My pal Tom writes about travel and wine over at vinoexpressions. He declined to offer his own numbers but was pretty convinced I was wrong:

Sounds optimistic – but there’s not much room left but to climb upward.

We’ll invite Tom to try to do better this year, but for now we’ll only trust his grape related insights.

The New Mexico Lobo expressed shock at what seemed to be unfounded and rampant optimism run amuck:

What? Only two bears??? In the spirit of Marty Z. here goes…
Hi: 1530
Low: 1160
Close 12/31/13: 1210
I hope that I’m the big loser on this one!

As were we all Mr Lobo!

And you got your wish: The title of biggest loser in our little contest for 2013.

But as your consolation prize you’ve earned your official spot as the Marty Zweig spiritual heir around here. Zweig being the frequent Rukeyser Wall Street Week guest who was always relentlessly and deeply “worried about this market.”

Zwieg was even right once in a while. Maybe one day you will be too. :)

Finally, we have smedleyb. I’ve put smedleyb last not because he was completely wrong, although he was, but because he provided a great idea for this contest:

Before I post my predictions, I would like to request a guest blog spot for a week if my unscientific guesstimate proves to be uncannily accurate. Fair? lol.

That said: 1550 SPX, (by March), 1250 SPX (by September) 1325 SPX by December 31.

Yes, the months too. (I don’t mess around with my market forecasts!)

But jokes aside, the market will definitely be lower by the end of year. And you can take that prediction to the bank (of Greece).

Ah well. What you lacked in accuracy my good Mr. smedleyb, you made up for in confidence! Good thing you had that Lobo guy to keep you out of the dog house. ;)

But while his predictions came up short, smedleyb’s idea of a guest post prize is a definite winner. Since this is my site and I get to make the rules around here, I’m going to declare two winners:

RobDiesel not only took the #1 spot for the low, he nailed #2 for his close and was bullish enough to be over 1800 for his high, good for #3. An in the money sweep and deserving of the win! Well done, Rob!

 RW for his extraordinarily bold prediction of 1875 for the high. His was the only one more bullish than mine and it came within a measly two points of snatching victory from my grasp. That deserves a win in my book.

OK, guys, to claim your prize do so in the comments below and let us know what your topic will be. Of course, we’ll all also be anxious to see what you’ll forecast for 2014 so a year from now we can laugh at you for being wrong!

For those of you that were wrong this year, there’s no reason you might not redeem yourself for 2014 if you’ve the courage (foolishness?) to try again. We’ll be waiting to mock you yet again if you fail. Heh.

Don’t feel bad. In all likelihood, you’ll get to mock me too. Here are my 2014 predictions:

High: 2218
Low: 1806
Dec. 31st, 2014: 2125

Clearly, I continue to be very bullish, but I don’t expect as strong a gain as 2013 or the same smooth uncorrected rise.  I see it continuing its sharp rise into 2014 followed by a 15-20% correction from those new heights before settling into a very handsome gain for the year.  Here’s why:

Since the Spring of 2009 we have been on a slow, grinding climb back from the brink.  Corporations have cut expenses to the bone and have accumulated formidable amounts of cash.  Balance sheets remain exceptionally clean.  I expect the pace of recovery to continue to accelerate as the market senses that stock prices will continue to build on the 13%+ increase they posted in 2012 and 2013’s 29.5% increase.  A rising market tends to attract capital and continue to climb. At least until it doesn’t. ;)

The correction will be triggered by some bit of unsettling news. Market players will suddenly look around and seeing how far and fast the rise has been they’ll pull back sharply. But it will be short as the stronger positive forces reassert themselves.

Gee, reading that it almost sounds like I know what I’m talking about and really can divine the future. Don’t you believe it. And certainly don’t take any of this too seriously.  My crystal ball is just as cloudy as everybody else’s.

I’m certainly not changing my investment allocation and strategy based on any of this nonsense and you shouldn’t either.  As Mr. Rukeyser would gleefully point out, past results are no indication of future performance and even I can be wrong.  As I’d point out, I most often am.  We’ll see come next New Year’s Eve.

But a little bit of nonsense is fun once in a while. If you agree or just think you can do better than those that stepped up to the challenge last year, I invite your participation. Please follow the format I used above, and in the comments section clearly state your call for the 2014 high, low and close along with a few lines as to why. That last will help me in mocking you when you turn out to be wrong and in praising you in the unlikely event you turn out to be right. :)

Finally, thanks for your readership and support of this blog!

Happy new year

May Your 2014 be Healthy, Prosperous, Free and filled with Joy!

And on your journey remember:

“Everything you want is on the other side of fear.”

Jack Canfield

Note — January 10, 2014: Contest Closed

With 7 trading days and the first full week of trading done, it makes sense to officially close our little contest to new entries.  After all, late entries have an advantage. Theoretically anyways. Mostly we have had a large enough response that it already looks to be a larger chore than I expected tracking all this to determine the year end winners and losers. Ah well. That’s a year from now.

The market closed today at 1842, down from the year end’s 1848. Essentially flat and unexciting.  Some believe the first week of January is a predictor of what the year will look like overall. If so, both our Bulls and Bears have got it wrong. We’ll see!

Addendum:

We like to capitalize on your stupidity

 

 

 

Posted in Money, Stock Investing Series | 89 Responses

Closing up for the Holidays, see you in 2014

Happy Holidays

Once again the blog is closing up for some R&R holiday time. You’ll still be able to poke around to your heart’s content, but I won’t be available to respond to questions or comments until after the New Year. But before this year slips away, I did want to say….

Have a Wonderful Holiday

and a

Happy, Healthy and Prosperous

New Year!

Oh, and if you need some ideas for toddler Christmas gifts here’s How to Give Your Kids the Best Christmas Ever. For less than 5 bucks.

And while you read the rest of this post you can listen to a bit of seasonal music from the USAF Band. Fun to watch it come together, too.

Friday December 20th the S&P brushed 1824 the year’s high, before it closed at 1818. This is notable because back in January I wrote a post titled How to be a Stock Market Guru and get on MSNBC. In it I invited readers to enter the first annual Rukeyser Memorial Market Prediction Contest. Upon my return we’ll review the results but you might want to start thinking about your own predictions for 2014 in case you choose to enter.

Oh, and my prediction for the year’s high? 1825. Not bad, eh? If you are curious you can read that post and find out how I did it. And why it is meaningless.

Meanwhile, as always when I leave for a bit, here’s a collection of random stuff that has caught my eye over these past few months. Enjoy!

mount-rainier-shadow-1[6]

Mount Rainier casting its shadow. Up.

submarine under street

What’s cruising under your street?

tightrope

For those not afraid of heights

When I went to FinCon back in October there were some 499 other financial bloggers there. Now I like to keep on top of this stuff as much as the next guy, but candidly I’m not going to wade thru 499 blogs to find the good stuff. Turns out, my pal JMoney does it for me and if you head on over to his site — Rockstar Finance — and subscribe he’ll do the same for you.

Each day he’ll shoot you an email with three suggested posts. It’s a great way to sample what’s out there. You might even find the occasional jlcollinsnh post. Not nearly often enough, but so far J$ has resisted my idea that Rockstar Finance really only needs one Rockstar…

old west

How the Old West really looked

coffeepic

How much caffeine do you get?

http://www.waitbutwhy.com/2013/08/putting-time-in-perspective.html

cornglass-gem-corn-0[9]

This is corn, and yes you can eat it.

The Global Rich List

tribal girltribal guy

Think the world is getting small and we are all becoming the same? Maybe not.

war statue mamayev-kurgan-4[3]

Soviet War Memorial: Notice how tiny the real people are.

A couple of videos:

Fine dining on tarantulas, cockroaches, scorpions and cow eye balls at

The Waldorf Astoria

At least they’re cooked.

13-year-old gives a TED Talk

chinese towers

The Towers of Kaiping

giantarrow.jpg.pagespeed.ic.luIOJaoZ06

Giant Arrows Across America

I didn’t know about these. Did you know about these?

Shark Bay

Where the red desert meets the blue ocean. Shark Bay, Western Australia

Since it is the holiday season and you’ll likely be spending time with close friends and family, let’s take a moment and examine the power of “strong ties” and “weak ties.”

USA by Brits

The USA as seen by Brits

WWII bomber

More color photos from WWII

Some interesting reads:

finding home in burgundy

What to get me for Christmas

http://www.richmondsavers.com/vanguard-funds-and-the-impact-of-fees-on-your-investment/

bear made of tires

Ever wonder what happens to your discarded car tires? Yong Ho Ji might just have released their animal spirits.

Chinese

Itchy Feet blog

Itchy Feet, the book

And finally remember in the coming New Year…..

Fear, the other side

See you in ’14!

Posted in Random cool things that catch my eye | 26 Responses

Betterment: a simpler path to wealth


picard

 Make it so, Mr. Data.

One of the things I’ve learned in the 2.5 years I have been writing this blog is just how many people there are whose eyes begin to glaze over at the mere mention of investing.

They know it is important but their mind just shuts down when the topic comes up. They have better things to think about, to do. Curing diseases, negotiating world peace, building bridges, teaching our children, patrolling the streets, raising their families and any number of other engaging activities that better fit their inclinations.

The problem is, of course, that money is key to surviving and thriving in our complex world.

Typically, these people turn to financial advisors and in truth the right advisor can be a sound solution. But not often. The problem is good, skilled and honest advisors are thin on the ground and finding the right one is often more work and risk than just learning this stuff yourself. But the harsh truth is, frequently that learning is just not gonna happen.

I can relate. Many are the subjects that cause my own eyes to glaze. Areas of my life where I just want to tell somebody this is the outcome I want and in a Captain Picard like fashion order, “Make it so, Mr. Data!”

Now, with a company called Betterment, we have exactly that…

data, commander

…a Commander Data of Investing, if you will.

I first came across these guys at FinCon back in October; these guys being Jon Stein the Founder and CEO and Katherine Buck, Community Manager.  Both are fully human in so far as I can tell, and considerably warmer than Mr. Data.

Over that long weekend we had several conversations that peaked my interest and several more by Skype and email these past couple of months. Plus I’ve been pouring over their website and discussing them with other financial folks I know and whose opinions I respect.

That’s why you are hearing about Betterment from me only now. It takes me time to get on board with a new financial concept like this. Crusty old geezer that I am, I’ve seen too many come and go. But I like what I see here, and here’s why:

A.  Your money is secure. This was my biggest issue and we spent a lot of time discussing it. More time, I gather, than they had been asked to spend before. Once I was satisfied, I asked Jon to put it into simple language and in his own words:

  1. Betterment is an investment manager. We advise customers how to reach their goals through a pre-determined portfolio of ETFs and then purchase those shares for our customers based on their final allocation setting, which they choose. We guide customers, but they finalize the stock /bond mix.
  2. Betterment maintains books and records of our customers’ accounts, and the clearing firm we work with keeps records of the same.
  3. We tell our customers what they are invested in — customers own these securities. If Betterment were to fail for any reason, customers would receive shares of the ETFs they own in-kind through SIPC insurance.

B. They understand and use the concept of index investing.

C. Your money is invested in low-cost Vanguard or iShares index funds, and I like the funds they’ve chosen.

D. Your money gets invested more broadly and in more funds than I discuss in my post Portfolio Ideas to Build and Keep Your Wealth. While the funds in that post get the job done, for the sake of simplicity I limited the number used. Adding more just doesn’t add enough value for the effort. But, with the effort seamlessly taken on by Betterment, a few more provides for a bit of useful fine tuning.

E. They create stock/bond portfolios based on your goals and then maintain that allocation for you automatically. You can accept their suggested allocation or customize it to your preference. Their software will then predict your odds of success.

F. You can create multiple accounts for multiple goals.

G. Once set they also automatically adjust the allocation in each account over time and you can easily change that allocation if you choose.

H. They can handle both your taxable and IRA/Roth IRA accounts.

I. Their costs are simple, low and clearly stated on their site. Under 10k = .35%, 10-100k = .25% and over 100k = .15%. Plus, of course, the expense ratio of the underlying funds.

J. They have a cool and engaging website that allows you to track your investments and might just kindle an interest in this investing stuff.

For example, here’s a chart showing how an allocation might change for a goal with a 25 year time frame. The closer to the time the money will be used, the more conservative the allocation. The various stock funds are represented in shades of green and the bond funds in shades of blue.

 

Betterment chart

One of the things that most intrigues me is that idea of easily having multiple accounts each targeted at different goals and with the different allocations those goals require.

For instance, one of the questions I frequently get here on the blog is what to do with money that is going to be spent within the next five years or so. Say, money being saved for a house down-payment or a vacation or to buy a car.

As I stress throughout my Stock Series, successful investing in stocks requires a long-term view and their short-term volatility makes them unsuitable for short-term goals. But cash accounts these days pay close to nothing.

The ideal solution would be a fairly complex blend of stock and bond funds balancing out the risk and adjusting as the time frame closes. I’ve never recommended this approach because implementing it was simply too cumbersome. But with Betterment this becomes easy-peasy.

Let’s suppose you plan to buy a car five years from now. Reading this blog you know paying cash is the way to go. Better to make the payments to yourself and buy when you have the money in hand.

Using Betterment you set up an account, make an initial deposit and tell it you are going to need, say, $10,000 in five years. Not only will it then sort out the most effective allocation and adjust it over time, it will tell you how much you’ll need to save/add to it each month to get there.

Of course, I’m not going to recommend this to you without trying it myself, and that example above is exactly how I’m going to use it. My initial deposit was $2500 plus the $25 they gave me for opening the account. So starting with $2525 and based on that five-year time horizon, I’ve set up the automatic monthly deposits of $100 Betterment has told me will get me to that 10k. I also chose to accept the 65%/35% stock/bond allocation they suggested. Depending on how my portfolio performs, they will also offer suggestions over time. Pretty slick.

But what is really slick is then you can begin to play. Plug in other numbers and do a little “what if” analysis. What if I funded it with an extra $1000? What if I deposited $200, $300, $500 or any other number per month? What if I let the money ride for 20 years? The software instantly shows you where you might end up.

Might not sound like a big deal, but it is surprisingly intoxicating. And very motivating. Just the thing if you are trying to inspire your children and introduce them to the magic of compounding. Or yourself.

If you want to give this a try, here’s how and what you can expect:

First, click here: Betterment

If you do you will arrive at a special landing page they’ve created for us jlcollinsnh.com readers.

Landing plane:page

Should be very smooth

 If you then follow the steps and open an account two things with happen:

  1. This blog will earn a commission. (Not that you should do it for this reason, but in the interest of full disclosure.)
  2. Betterment will waive their fees on your new account for 3 to 6 months depending on how much you start with.

Filling out the forms takes about ten tedious minutes, but then I find form-filling-out especially tedious. Still as such things go, it wasn’t too bad and I never threw up my hands in disgust or quit in despair. No small thing given my temperament. Heh.

Next they’ll send you a couple of emails verifying some stuff. 

Then:

  1. You’ll link to your bank.
  2. They’ll make a small deposit in your bank account based on the info you gave them to verify that link works.
  3. Once linked you can with a click move money into your Betterment account and set up automatic investments if you care to.
  4. Once the money arrives in your account, Betterment sends you an email letting you know. Personally, I really liked this feature as it saved me having to log on to check.
  5. Even more importantly you can, with a click, access your funds in Betterment. Not that us long-term investors want to do much of that. But it is always good to know you can get to your dough anytime and without fuss.

You’re good to go.

Recommending these guys is a big step for a hard-core Vanguard index investor like me. It might have you wondering just how and where I see them fitting in. They, of course, would say they can and should handle everything short of your 401k/403b/TSP plans. But there are fees involved here and, modest as they are, you don’t want to pay fees unless the value added is worth the price.

I see it this way:

If you have/can read thru and understand the Stock Series here on the blog you are good to go and DIY (Do It Yourself) directly with Vanguard.

But you might do well to consider Betterment if:

1. You really have little or no interest in this stuff and just want a solid plan created based on your personal goals. This is the same attitude you’d bring to an advisor but with Betterment you get the plan and results with less cost and risk.

2. You want to be invested now, but are still too early in the learning curve to DIY.

3. You are personally comfortable with investing but you also have this responsibility for your child or parent and see this as an easier, more effective tool for them. This is why I suggested Betterment to Colin in this post.

4. You are looking for an effective and efficient method of saving for short-term goals. This is how I’ll personally be using them.

5. You want to leave a financially disinterested spouse an easier way to deal with money than the DIY approach you’re comfortable with.

6. The time comes when you are no longer interested, willing or able to monitor your investments.

There could be many reasons for #6, but the one that as a geezer I’m personally starting to think about these days is aging. The harsh truth is that at some point, if we live long enough, our cognitive abilities begin to wane. Happens to all of us. And when it does, you don’t want to be hands on with your investments. Far to easy to be tempted into some wild scheme by those who specifically prey on the elderly or simply by our own delusions. When that time comes, .15% is a very small price to pay.

One final thing. If you’re like me you also like to know the people you’re dealing with.

As I said in my second to last post, I like smart people. And when it come to investing I like people who understand the key basics that lead to financial success. Jon fits the profile.

Since I can’t introduce him to you personally, this 2.5 minute video will help. In it Jon walks you thru a quick overview of the Betterment approach and how it works. He also talks a bit about how he runs the company. My guess is, like me, you’ll be impressed on both scores. But more importantly you’ll get a sense of the guy behind the company.

http://vimeo.com/61639916

If I’d known him sooner I would have been an early backer. Were I younger, I’d be sending him a resume.

Addendum #1:  A note from Betterment to my International Readers…

“Betterment currently only operates in the United States, and for regulatory reasons cannot accept customers residing outside the country.  A customer must have a permanent U.S. address, a U.S. Social Security Number, and a checking account from a U.S. bank.” 

But the good news is, I’ve asked them personally about this and as they grow expanding internationally is definitely in the plans. I’ll keep you posted.

 

Posted in Money, Stock Investing Series, Stuff I recommend | 51 Responses

Case Study 6: Helping an ill and elderly parent

mother and adult childern

(Not actually Colin, his mother or sister)

Courtesy of Visual Photos

In today’s Case Study reader Colin offers us a chance to take a look at a tough situation many us have had or will have to deal with at some point. Many years ago, I did myself and with a situation eerily similar to Colin’s. His mother is sadly facing a serious illness and, with his help, is sorting thru a mix of investments that appear to have been chosen for the benefit of those selling them.

In this study we’ll see another example of why I don’t like investment advisors and we’ll examine some steps Colin can take to help his mother escape.

While I have already responded to Colin in Ask jlcollinsnh, it occurred to me this is a case that deserves wider readership. Many of you might benefit from the conversation and others might well have useful suggestions for Colin as well. If you do, I hope you’ll add your thoughts in the comments.

Here is Colin’s note:

I recently started reading your blog and I really enjoy all the great articles and advice.

I’m fairly confident when it comes to my own current investments, but I’d like to help my mother get her affairs in order and although I have ideas I’m a bit overwhelmed. I currently live in Germany so I’m somewhat limited with some of the help I can offer when I’m not in the US. I’m currently back in the US through the first week of January.

She was recently diagnosed with two types of cancer. One is a slow moving lymphoma and the other is squamous cell lung cancer which is large cell and less lethal than small cell lung cancer. She thought she was going to have surgery this week to remove a lobe of her lung but the date was moved to February. I came home with the intention to help her with her recovery but now that we have more time and energy I decided with her consent to help her get her home and finances in order.

My mother will be 65 in March and is retired. She receives $1,200 a month from social security. She has $40,000 in investments with Edward Jones of which $30,000 are in a taxable account and $10,000 are in an IRA. I was fairly shocked when I looked at what the taxable account is comprised of:

  • Freeport-McMoran Copper & Gold – FCX $13,876
  • Dawson Geophysical Co – DWSN $6,464
  • Broadcom Corp – BRCM $720
  • Patriot Coal Corp – PCXCQ $42
  • Hartford Balanced Income Fund C – HBLCX $11,071

The individual stocks are all holdover investments from a previous advisor at a different company my mother used.

I asked why no one at Edward Jones had sold the stocks as it is obviously very risky to have so much of ones money invested so narrowly especially at her age. She said that her current advisor wants to sell them but is waiting for the right time. That statement is a red flag to me. My mother did ask the advisor to take a small amount of her money and invest it aggressively.

I’d like to sell all of these stocks and the mutual fund and move most the money into Vanguard Total Bond Market with a small amount in Vanguard Total Stock Market and either a savings account, money market, or cd.

I know bonds are generally placed in tax deferred accounts but her income is so low I think her taxes would be minimal. Patriot Coal Corp is in the process of declaring bankruptcy and I was thinking it may be possible to use some of the capital losses to offset any capital gains. I’m not sure how bankruptcy affects selling stock. I realize that the stock may just be a total loss.

I think my mother would possibly like to stay with Edward Jones as they offer face to face advice (although I’m skeptical of the quality of it). I’m not sure if it would be possible to buy the Vanguard funds through EJ.

Would it be better to wait until the new year to put off paying taxes on the sale of the investments until the next tax year? I believe the Hartford Balanced Income Fund has a deferred load of 1% so I should probably read more about possible costs of selling it. If I transfer the investments to Vanguard from what I’ve read it would be better to transfer them in kind but I’m not sure all that implies.

Her IRA consists of:

  • Franklin Income Fund A – FKINX $4,240
  • Income Fund of American Fund A – AMECX $3,700
  • Lord Abbett Short Duration Income Fund A – LALDX $2,467

I’m slightly less concerned with these investments, but I’m nervous about how heavily they are invested in junk bonds. I didn’t know that mutual funds existed that would invest in dividend paying large cap stocks along with junk bonds. It is an interesting idea but seems overly complicated and risky. I would probably like to move these investments to Vanguard and place them all in Total Bond Market.

English cottage

Courtesy of Lilac  & Lavender

She owns her home with no mortgage in West Virginia on 60 acres in a rural area. Overall the house is in good shape but could use some repairs to plumbing and eventually will need a new roof. I’m sure other expenses will come up as often happens in life. The value is in the range of 80 to 100k. She has no desire or plans to move.

I think a possible asset allocation would be 70% Total Bond Market, 20% Total Stock Market, and 10% mix of savings account, cds, and money market. I like the Total International Stock fund as well (I own some in my AA) but it seems more volatile than is necessary.

She has a life expectancy as little as one year but possibly ten or more. It is really hard to tell at the moment. Besides the cancer she is very healthy and active. She will probably know more after her surgery in February but even then it is very uncertain.

I think it makes sense to have her assets as stable as possible so she can access the money as needed to make larger purchases for car and home repair.

My mother has a will and living will already. My sister and I are her only heirs and we are close and generally agree on how to proceed with all of these issues. My mother seems hesitant to spend the money to go to an estate lawyer but I think it would be good to go to see her options to protect her remaining assets and especially her home from medical debt.

I’m not concerned with inheriting the house or money but I also don’t want her to have to sign it over to the bank or hospital (she doesn’t either). She has been receiving a very generous amount of charity aid from the two hospitals she has been going to but the she has to reapply every six months. Currently she receives a 75% discount from one and a 100% from another. This won’t cover certain doctor’s fees though. She will have Medicaid until Medicare starts the month before she turns 65.

In your opinion does my mother have enough assets to warrant going to an estate lawyer?

It isn’t easy for me to make decisions with someone else’s money, but I don’t feel that my mother’s money is being handled appropriately.

I’ve read quite a few investment books at this point, but I have limited knowledge about issues she is facing. I’d hate to have someone from Edward Jones sell her another front load mutual fund with high fees and costs. I also don’t want her to lose her house. I know the decisions I make are ultimately my own and my responsibility but any advice would be greatly appreciated.

Thank you for your time,

Colin

And my reply:

Hi Colin…

I am very sorry to hear of the challenges your mother is facing with her health and finances. She is fortunate to have you there to help sort thru it all. And it is very fortunate she is open to your help and that you and your sister are on the same page.

You don’t mention what her annual expenses are, but I’m guessing she gets by on the $1200 from Social Security. I’m also going to assume you and your sister are willing and able to kick in to help support her if needed. This will play a role in the idea I’ll be suggesting at the end of this reply.

I am concerned that your mother asked the advisor to take a portion of her money to “invest aggressively.” This is the last thing someone her age and with her limited resources should be doing. Hopefully the advisor was honest enough not to take advantage of that request, but typically that’s like providing chum to sharks. In any event make sure it is off the table.

jaws

You are right to be concerned about her assets being in individual stocks and the advisor wanting to wait to “sell at the right time.” My guess is that this means some, in not all, are trading at a loss. It is foolish to hold on to these hoping for better days.

I agree with your plan to sell them all and redeploy the money at Vanguard in the Total Stock and Total Bond Funds. It is also a good idea to hold some cash for the house and car repairs you foresee. You are correct in that, at her income level, taxes are not much of a concern.

You should be able to sell the shares in the bankrupt company, but of course not for much.

It might be possible to buy the Vanguard funds thru Edward Jones (EJ), but why? You want to take all this and the IRA money out of EJ. Looking at what they have her in, the last thing your mother needs is more free advice from them. Clearly, these investments were made to benefit the broker, not your mother.

Likewise, roll the IRA into Vanguard. You can call Vanguard and they can help with the process. Don’t be surprised if EJ drags their feet and otherwise makes this difficult. It happens all too often. They don’t like seeing the gravy train head out the door.

Since your mother has minimal tax concerns, with the taxable account the easiest thing to do is have EJ sell everything and send her a check. She owes them no explanation. You could also do this with the IRA but you’d have to be sure to reinvest it in the Vanguard IRA within 60 days to avoid any taxes. But again, not a big deal for her.

Since we are near year end and just to spread the tax liabilities a bit, assuming there are capital gains in those stocks (and if not, no tax worries at all), you can sell the taxable stuff this year.

Then in January move the IRA to Vanguard and convert it to a Roth. Theoretically this will be taxable, but again in your mother’s situation a non-event. Once there, she’ll never have to pay tax on any withdrawals from it. Plus the Roth is much more advantageous to you and your sister should you inherit it.

Be sure she lists you as beneficiaries on all these accounts. This avoids probate and insures it passes seamlessly to you. Same with the taxable stuff.

And no, your mother doesn’t have enough assets to need an estate lawyer, but be sure her will is up to date.

As for the house, it sounds like that is where she is most comfortable and since she’s been there awhile and it is mortgage free I see no reason she shouldn’t stay as long as she is physically able.

My guess is that you might get some push back from her on leaving EJ. Sounds like she enjoys the interaction. But she is paying too steep a price. Here’s an alternative that would serve her better.

If you look at the right hand column here on the blog you’ll see an ad for Betterment. In the next few days I should have a post up recommending these guys. Not quite as cheap as DIY with Vanguard, they do provide an exceedingly simple way to invest in a portfolio of index funds. Rather than choosing the funds yourself, you open an account and tell them your goals. The software then suggests the asset allocations to reach those goals. Very simple and effective, and maybe just the level of involvement that your mother will enjoy with out the risk of expensive mistakes or her being sold high-profit-for-the-broker crap.

You mention a concern about losing the house to medical debt, but it is unclear in your comment whether she has that debt now or is concerned she might in the future. Regardless, she might want to consider moving some of her assets to you and your sister, and this is the idea I referred to in the beginning of my reply.

The IRS allows your mother to gift you and your sister each $14,000 with no tax consequences to you or her. If she can get comfortable with the idea, it would effectively take her taxable account from 30K to 6k. Less worry for her and possibly helpful in insuring the charitable benefits she now enjoys. Of course, if the time comes when she needs the money, you and your sister must be prepared to channel it back to her.

Hope this helps. Good luck to you and all the best to your mom!

Addendum #1:

Second thoughts on having mom gift money. From aspiringyogini in the comments below:

“I’m glad to hear that you will be talking to an elder care lawyer. We have consulted one too and have had good results. Your lawyer will very likely urge your mother to NOT give you money, just in case she needs long term nursing care and might need to qualify for Medicaid to get coverage. In order to qualify there is a 60 month look back period and if she has given money to her kids, then she would not qualify. This website echoes that and our elder care lawyer confirmed it too:http://www.elderlawanswers.com/how-gifts-can-affect-medicaid-eligibility-10006

Addendum #2: 

Also see Prob8’s detailed comment below. He is the author of this guest post:  Death, Taxes, Estate Plans, Probate and Prob8.

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