Archive for General Financial Planning

Some resolutions for millennials

I thought I might start off January with some financial resolutions for people at different stages of life, based upon what seems to be difficult but achievable. I’m not going to suggest lose weight and get more exercise because I’m going to try to come up with things you and I might actually do. I’ll disclose a secret and say I’m not actually a millennial. But one lives here, and I meet with millennials fairly frequently. Even if you’re not a millenial, some of these will still apply. So here goes:

  1. I will calm down about my student loans. Just about everyone has them, and everyone hates them. It’s probably too late to do anything about what you borrowed, now, so you have to think through how to manage them. They’re not shameful—they were an investment you made in getting a better job. If they’re fairly low, say under $30,000, it’s really the equivalent of paying off a car over 10 years (rather than 3 or 5 for an actual car). If they’re higher, hopefully you have selected a career that made it worthwhile—if not, you should definitely look into the various programs to bring down the monthly payment.
  2. I will assess whether I should pay off my loans early. If your loans are the subsidized kind (under 4%) you’ll probably be better off investing and saving rather than rushing to pay them off—in the long run, the same money judiciously invested will earn more than the loan is costing you.
  3. I’ll make sensibly frugal choices. Don’t buy an expensive car (or even a new one) until you’ve worked out a budget. Watch the rent you commit to paying. Try to downshift spending without denying yourself the fun—go out, but maybe drink beer instead of a craft cocktail. Meet for drinks instead of dinner. Choose a medium priced restaurant and do your gourmet eating and drinking at home—you can buy a pretty darn good bottle of wine for the cost of a glass or two at a restaurant. You get the idea.
  4. I’ll contribute to my retirement plan the day I’m eligible. There will never be a better time in the future when it will be easier. It’s always hard. If you never get used to that 10%, you won’t miss it as much.
  5. I’ll think of that retirement account as gone and locked up. Don’t borrow from it and don’t even think of cashing it in when you change jobs.
  6. I’ll build up an emergency fund before I take a vacation. Or buy a house. Or have kids.
  7. I’ll commit to paying off my credit cards every month, and pay attention to how to maximize rewards. Play that right and you’ll be able to take more vacations.
  8. I’ll manage my career. Think of your career as an investment asset—get all the training you can to continuously upgrade skills. Everyone gets a terrible boss someday, and everyone has co-workers they can’t stand. Get interpersonal skills training, read up on coping skills, and always have a plan B for moving on. Go to conferences and networking events in your field, and learn as much as you can about marketing. If you’re dreaming about a creative or independent job, realize that at least 60% of that job will be selling the product, not creating the product.
  9. Insofar as possible, I won’t quit without lining up another job. If I get fired, I’ll find career services or a job hunting group to get me back on my feet as soon as possible. Losing a job is debilitating and depressing, even if you hate it. Finding a new one is a part time job. Plan for it.
  10. I’ll pay attention to my employee benefits. Employee benefits can be worth 1/3 of your salary. Does the job offer a Flexible Spending Account? Disability coverage? Free life insurance? How much vacation time? What’s the deductible on the health insurance? Decent or crappy investment options in the 401k? Good employer match, bad, or none? Will they pay for more education (which I will definitely avail myself of)? These are things that you should know before you accept a job, because they’re potentially worth thousands to you. I can’t tell you the number of people I’ve seen who have paid for a lawyer to produce a will (or not made one at all) when their employer offers low cost legal service. Just go light your cigar with a $500 bill.
  11. I’ll set savings and required payments on autopilot by setting up auto withdrawals. Making a decision once, by setting them up, is more likely to continue (on time) than if you have to make a decision every month. You can always cancel the auto-pay if you absolutely must.
  12. I’ll learn about investing. Even if you’re a good saver, you need to educate yourself about investing. I can almost guarantee you didn’t learn about it in school, and unless your parents were exceptional, you didn’t learn it at home either. The only way is self-study—and don’t believe anything you hear at one of those free “investing” lunches—nothing in the investment world is EVER free.

 

Happy new year and best wishes for 2018.

Amazon, Whole Foods, and you

The takeover of Whole Foods by Amazon was approved this week, and we’re told that by Monday we could be seeing some big changes in the whole grocery business.  This has occasioned an awful lot of clothes-rending on the internet, and even Robert Reich (who I normally respect) has weighed in on what a terrible thing this is. Now Reich is a brilliant guy, and I’ve never been Secretary of Labor (although I’m pretty confident I could do a better job than the current incumbent), so I’m only going to argue here out of my own experience. I think the picture is actually more nuanced than that. So, here’s my take on some of the most prevalent commentary.

Amazon will monolithically rule the entire world of commerce. In my lifetime, just thinking about the grocery business, I’ve seen purchasing habits go from mom and pop stores (not always the cleanest, freshest, or best stocked), to a whole bunch of grocery stores (in this area, National Tea, Jewel Tea, A&P, and later Dominicks) to only a few bigger players and larger stores (Jewel & Dominicks). There once were some pretty seedy little health food stores that smelled strongly of carob and fermenting apples. I, personally, was thrilled when about 20 years ago a now pint-sized Wild Oats opened in Evanston—such a difference in quality! Bigger national players bought regional chains (Jewel has been sold countless times, Dominicks went kaput, and Roundy’s just bought Mariano’s). Even in health food stores, Wild Oats bought People’s Market, Whole Foods bought Wild Oats, etc. At the same time, I’ve seen more boutique specialty stores open (and close)—Fresh Fields, Fresh Market, Valli’s produce.

I do think I’ve seen a startup->buyout->behemoth in virtually all retail, and eventually there seem to be boutique spinoffs to serve special needs. Even within the organic foods market, smaller producers are routinely sold to larger entities. Applegate is owned by Hormel, for example. If you’ve ever tried to produce a product, eventually you reach the limits of scalability—you have to buy in larger quantities, or manufacture and distribute more efficiently, or compete not only on quality but also price or go out of business as the founders get old or exhausted. The big fish with the better supply chain and distribution network take over. For now, Amazon is the best game around, and I don’t know anyone who hasn’t shopped with them.

Amazon will force everyone to shop with it. Let’s think about why Amazon is such a success so far. Because they have things, and can get it to you fast. Example: I needed a $3.00 item, a new roller switch for a lamp—this is about the level of electrical repair I thought I could handle. Went to Lowe’s—nothing. Went to Home Depot—had one, but it turned out to be the wrong size, and that was all that was available. Went to locally owned Ace Hardware to get some personalized advice. Sent me home with another one—also the wrong size (same as the one Home Depot sold me, so much for advice). Went to a local electrical supply outlet, which turned out to be shut down. Went to a lamp and lighting store—they didn’t carry parts. These excursions took the better part of 3 afternoons, and I still didn’t have the part. And guess where I found exactly the right thing? A five pack for $10, delivered free.

From my perspective, the chief reason I order from Amazon is that I can find what I want without chasing all over town, and it will be in stock. I’d like to have that kind of reliability locally, but I don’t. And for about the past year, Whole Foods has been woefully understocked—we waited 6 weeks for crunchy house brand peanut butter. Years ago, Barnes and Noble was a thrilling improvement to places like Kroch & Brentano’s, but B&N has nowhere near the selection that Amazon offers.

However, two of my favorite independents: Bookends & Beginnins in Evanston and the Seminary Co-op in Hyde Park, do a far better job of peddling interesting titles I would never discover on Amazon. Farmer’s markets, gourmet specialty stores, and single product shops (like the Spice House) might be the food purveyor counterpart.

Amazon will jack up prices. Certainly a possibility, but it didn’t happen yet in the book world. Amazon, even after years, is still the lowest price in the book trade. In my view, Amazon still competes very strongly on price and selection.

The deal only benefits shareholders.  Okay, I admit, I’m one of those shareholders, of Whole Foods. I’ve owned it forever for two terrible reasons: I have liked shopping there (even though I think it’s drastically deteriorated over the past year), and I kept hoping it would “come back” stock price wise. This idea of the greedy corporate octopus that doesn’t care about anybody but (rich) shareholders has me a bit bemused. Because it’s extremely likely that those (rich) shareholders are YOU! If you have any money at all invested in stock mutual funds—S&P 500 funds, Target Retirement funds, even specialties like the Fidelity Contrafund or Parnassus—you own at least Whole Foods and in most cases, Amazon. Many people with 401ks or other workplace retirement plans have no idea what they actually own, and just want the value to go up. How on earth can value go up if companies don’t keep an eye on profits?

And the one I’m ACTUALLY really worried about, but no one else seems to be: The merger will result in loss of community.  One of the main ways I get out of the house and see my neighbors is at the grocery store. I see community events posted. Whole Foods used to offer talks, charity events, demos by local producers, and classes. Those have slowly disappeared in the past year, but I did still have a chance to chat with random strangers, the regular store staff, and there was somebody to complain to and voice concerns about products. Now it seems we’re moving to a society where we’re holed up in our individual homes, potentially ministered to by drones and robo-communications, and it’s dang hard to raise anyone to attend a club meeting anymore.

Independent bookstores and cafes are actually stepping up to this role, but it’s only a very small and elite subsection of the neighborhood that actually attends these events. But we are increasingly losing the agora, and I don’t know how you quantify the value of that.

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Nothing is Everything

I’m a fool for doing this, but I do read some comments on Facebook posts. I saw a rather touching one recently, where a young woman noted, “When you have kids, they’re your everything”. Boy, do I know what she means. In my uber-Mommy phase, I went so far as to wear a corduroy jumper  appliquéd with a teddy bear carrying a Christmas tree, just because it would delight my then-little daughter. Luckily there are no pictures.

Over time, I’ve also heard people declare their spouse, lover, job, and pets to be “everything”. Then there are the magic bullets we are asked  to believe in: the right eating program (vegan, low carb, low fat, clean eating, snore…), the cure for allergies, the perfect drug, the cure for pain—cancer—aging… Or the magic investment program that will make you a trillionaire without risk or worry or much effort on your part…gold, market timing, 1000s of methods of stock selection, buy and hold.

None of this is right or true.

Being the omniscient person that I am, I actually have the right method: diversify!

Let’s go with the personal, first. People who make kids, or a spouse, or any other person their everything tend to lose, not only that person, but just about everything else. So in the event of a divorce, or death, or just the time of life when they need to get their claws out of the other individual, they find they have nothing left.  My mom was my dad’s everything for more than 50 years; he disintegrated after her death. Kids grow up and you’re stuck with the spouse you used to have. Or you find yourself at 50, with no career, no wardrobe, out of date competencies, and a divorce. Sure, you love being with that adorable toddler, but make yourself get out without them. By 12 or 13, they won’t want to be your everything. I used to have a sign on my bedroom door:

Are you bleeding? Is the house on fire? Then, don’t knock.

Worked great with my kid. Not so much with the ex, which is at least one of the dozens of reasons he’s an ex.  And BTW, for heaven’s sake stop using your kid, dog, or cat as your FB profile picture. Your own identity will always be important.

All the magical bullet medicine is just one of the reasons I support universal healthcare. Hardly a day passes without some miracle nutritional scheme or magic cure on my Facebook feed.  The years since the discovery of penicillin and polio vaccines have made us all worship at the magic pill church—that there’s an easy cure for everything if we just swallow the (highly profitable to pharma and biotech companies) right pill or program of eating. Universal health care might put some restraints and cost controls on medipharma’s tendency to nuke everything, and if one bomb doesn’t work, 7 or 8 will be better. I’m way more worried about getting too much intervention than not enough.

Hearteningly, I am also beginning to see articles cautioning how over-medicated, endocrine disrupted, and un-resistant to bugs our bodies have become. Michael Pollan has offered us probably the most sensible advice: Eat food. Not too much. Mostly plants. No mention of juice cleanses or meal kits. Simple diversification.

And finally we get to my corner of expertise—investments. Scratch any two investment managers and you’ll find three opinions on what the correct investments are. What is the best allocation, the best asset classes, the best tax home? Does all this matter? Sure, that’s what we get paid for, and a good allocation can make a difference, a small difference but spendable in a big enough portfolio. But I’m here to declare something radical: the biggest difference is selecting a decent diversification and sticking with it.

That can be a target date fund. Seriously. I have some real problems and reservations about them, but it’s way better than putting all your money in the S&P 500 fund—which is still better than picking a stock or two that you’re sure is hot—or the so-called stable value fund. A target date fund gives you some diversity.

But should you put 50% of your stock allocation in U.S. and 50% in international? 2/3 US, 1/3 international? 10 funds instead of 12? In the big scheme of things, I can fiddle with allocation projections to give you just about any result you want, given your risk tolerance. But the best answer is—it doesn’t matter nearly as much as long as you diversify.

Accumulate something you haven’t spent on meal kits and Tofurky, then pick an easy, diversified fund. Once you get into 6 figures, you can start to benefit from selecting your own allocation—the small difference in specific allocations will start to be visible. And even though it’s heresy to many financial planners who salute the flag of mutual funds, I don’t think you’ll necessarily end up in a trailer by the river if you buy a few individual stocks. But don’t make those your everything, either.

Caveat: no specific investment advice is intended. Your individual investments should be selected based on your goals, risk tolerance, and other individual factors.