Book Review: The Great Depression, A Diary (or why buying low is so hard)

Benjamin Roth was a young lawyer living and working in Youngstown, Ohio during the Great Depression. In June of 1931, just over 19 months after the calamitous stock market crash in late October of 1929, Roth started journaling his thoughts about the stock market, banks, his law practice, politics, and investment opportunities. After the stock market crashed in 2008, Roth’s son, Daniel, knew it was time to honor his father’s memory by publishing his father’s writings. The timing was right, and although we are now 8 years removed from the stock market lows of 2009, Roth’s accounts of the Great Depression refreshed my thoughts of our most recent economic catastrophe.

The importance of this book

Beware the danger of hindsight bias. Here’s the definition:  “the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it” It is a near impossibility to keep our hindsight bias from kicking into gear when examining historical events. Our bias often leads us to overconfidence, luring us into making decisions for the wrong reasons, possibly damaging our lives and our loved ones along the way. That is exactly why Roth’s personal account of the events and people of the 1930s is so valuable. When considering the Great Depression, I have been quick to make judgement on how leaders, business people, and families should have reacted if they would have only kept their calm and made rational decisions. I can’t say how representative Roth’s reactions to the Depression were of all who lived through it, but he is proof that there were people able to keep their emotions in check while the economy was collapsing around them. Roth’s dispassion is remarkable, especially considering he was responsible for providing for his wife and 3 young children during that time. But Roth was not without reasons for hope even during dire economic times. He was an educated professional, and as an educated man, he had knowledge of history to rely upon. Most historical market charts used today start in the 1920s which causes the history of markets before the 20s to be downplayed, if not forgotten. However, Roth had a high awareness, not only of the stock market and investments in the 1920s, but also of economic recessions in the United States prior to the Great Depression. Roth didn’t even own stock when the Great Crash hit (only 2.5% of Americans did), but he was highly aware of stock markets happenings and history. Roth often references the crashes and recessions of the 19th century, and uses them to forecast the length, severity, and opportunity of the Great Depression. Many of his predictions are far off (just like everyone else’s of that time…and today). But many of his insights were remarkable. The richest part of Roth’s diary is his predictions of the  future and the later comments he made about his predictions and whether they were right or wrong or very wrong. But therein lies the tragedy of Roth’s diary: he had fantastic insights and admirable emotional self control, yet he was still unable to take advantage of the investment opportunities the Depression offered. In fact, only an elite class was able to take advantage of the rock bottom asset prices because only they had surplus income/capital after they made sure they could provide for their families.

Why buying low is so hard

Starvation is not a threat in 21st century United States, and it likely wouldn’t be even if another depression hit. But the same dilemma that kept Roth from taking advantage of panic prices in assets in the 30s still keep people from doing the same today. Why is that? The dilemma is that the only time assets lose significant value is when the economic stability of the future is jeopardized and uncertain. It’s at that moment when a working family can’t rely on their ability to earn an income, because their business may dry up or they may be laid off. So instead of looking for investment deals, a family pays off debt to lower their risk, or they increase their savings, or they use all they have to buy necessities. And the opportunity of a lifetime drifts by. However, hindsight bias kicks in again. If we truly knew the opportunity of 1932 or 1939 or even 2009, there is no doubt we would have made some radical choices to get any assets we could invested in the stock market or other assets like real estate. But in the midst of those times, investing looks like foolishness, not opportunism. Most discouraging about those missed opportunities is that even when someone recognizes the opportunity and has the resources to take advantage of the opportunity, it’s still not certain they’ll profit! Roth tells the story of a friend who had the wherewithal to buy 1000 shares of Warner stock in 1935 for 3 ⅛. The stock went to 18 in two years turning a approximately $3,000 investment into $18,000.  Instead of selling out, his friend borrowed money on margin to buy more stocks. The crash of 1937 came shortly after, and his friend lost everything. Even someone who maintained the optimism to invest got taken down by the market…if only he had not borrowed to invest.

Lessons for today

Roth comments often on the dangers of borrowing money to invest in anything. Sure, in a rising market it makes an investor much more profitable to borrow to invest. But markets have never, ever sustained their rises indefinitely, and at times, you get entire decades when the market crashes frequently, decimating anyone who has borrowed to invest. Roth claims that every single person he knew who had borrowed to invest was wiped out in the 1930s. Roth became a student of investing during the Depression, and he shares a lot of his education in his diary. Most of this investment advice is very conservative in nature, but an ultra conservative investment strategy is the only way investors didn’t lose their shirt in the 1930s. Today, many people are comfortable taking considerably more risk than Roth would recommend in the late 30s. And if we never hit another depression like the Great one, then it is a wise strategy. But is it a guarantee that we won’t hit another depression as long and deep as the Great Depression? Absolutely not. However, is it even remotely likely? That’s where the real debate lies. Much has changed since the 1930s. Our financial system today is much different from the system of Roth’s time. Perhaps we have the mechanisms to avoid another depression…or perhaps it’s arrogant to think we are different from those in the generations before us. And that to me is the greatest value of this book. Although we live in very different times, we are not so different than the generations before us. We can learn from what they went through, but we cannot claim we have a superior enlightenment that will protect us from all catastrophe. We have to live and make decisions in humility, recognizing our own naivety and limitations. If we do so, we still may fall victim to the disruptive forces of this world, but we will have the strongest defense available to us: the willingness to educate ourselves.

Recommendation

I can’t recommend this book to every reader. Roth’s inclination to make investment strategy a major theme of his writings will bore and disengage many. To those who enjoy investment insights and the stock market, Roth’s book, along with editor’s James Ledbetter’s insight, are guaranteed to entertain and educate. If you don’t fancy stock talk, I don’t recommend this book. However, it is essential that everyone spend time educating themselves about the Great Depression to 1) learn to be thankful for the era of plenty in which we currently live, 2) to humbly recognize how vulnerable the complex systems around us are, and 3) to have a basis for how to react in the case we go through something similar…or worse. No matter what lies ahead of us, ultimately, if we understand the true nature of this world…the best is yet to come.

My old 401(k): Here’s what you really need to know

You have an old 401(k) (or other company retirement plan) your former employer is telling you to do something with or you feel is hanging out there aimlessly. You need to “take care of it” one way or another. It’s the #1 reason people reach out to me as a financial planner. It’s also the exact situation financial advisors seek to prey upon because it’s the easiest way to gather assets on which to make a fee or commission. That leaves you, holder of the old 401(k), in a tough spot. You want to get closure on this account, but you don’t know how, and you don’t know who to trust to help you figure it out. There is no clear path ahead. It’s a crummy feeling. In 5 minutes, let’s clear your path so you’ll know how to handle your old 401(k).

First, you don’t have to do anything with the old 401(k). You can leave it there if you’d like.

Is that the best decision? It depends. Worst case scenario is the plan provider will boot you out, send you a check for the proceeds minus tax and penalty withholdings. Those withholdings won’t be a lot in dollar terms, because providers usually only boot you out of the plan if your balance is small (usually $5,000 or less). So what would it look like just to leave it where it is? Why would you do that? Old 401(k)s may afford you benefits you can’t find anywhere else. There are a few benefits to look out for. First, do you have company stock in this plan? If yes, you have to consider your long term tax plan. The retirement plan structure gives you options with how to treat that stock in the most tax efficient manner possible. How that works is beyond the scope of this post, so get professional help if you own a lot of company stock (more than 5% of your net worth). Second, does your old 401(k) offer you access to investments no other plan or provider can? Some company plans have negotiated some sweet investment options, most commonly a stable value or guaranteed fund that pays a more robust interest rate than relative alternatives. Finally, by moving the old 401(k), will it be subjected to new expenses and fees? As mentioned earlier, the financial advising sales force is always interested in folks moving old 401(k)s so they can make a sale.

But that doesn’t mean leaving it is your best choice because…

Your old 401(k) may be awful. Awful would be defined by three factors: high costs, poor investment selection, and shabby service/user interface.
High Costs
How do you know if the costs of your plan are high? First, know what you’re looking for. The costs most commonly assessed on you are fund expenses (expressed as an expense ratio), advisory fees, and recordkeeping fees. Next, login into your old 401(k)’s online account access (if you don’t know how, reach out to the HR person in your old company), then within the website, find the Summary Plan Description. It should be available to you in PDF format. Once you’ve opened the PDF, do a CTRL+F (or COMMAND+F) to pull up the document search and try using any of the following terms: fees, expense(s), commission, charges. That should lead you to the content you’re looking for to determine what costs your old 401(k) levies. If it doesn’t, keep searching the website, the information is likely there. Still no luck? Call the customer service # to get help. Information on costs is too important to remain naive.
Crummy Investments
How do you know if your plan has poor investment selections? This is tough, because everyone’s investment preferences are different depending on their perceptions, experience, beliefs,  and risk tolerance. Very generally and simply speaking, I’m looking for low cost, highly diversified options in stocks and bonds. That is enough for me to have confidence an investor can be successful.
No engagement
Finally, you’ll know if your old 401(k) has shabby service or a complex user interface by answering this one question: is it difficult for you to access, get information on, and make changes to your retirement plan? If you’ve tried to work with your old 401(k) and you find any of that to be true, then you need to simplify by moving the account. If there is a high risk your old 401(k) will fall into your “out of sight, out of mind” mental category, neglect could wage a high cost, and you should move it. Change happens in life and these assets may need altered in response. But you’ll never know if the old plan is basically abandoned as an afterthought. There lies the single most powerful factor in deciding what to do with your old 401k. It needs to be in a place where it can empower your decisions today. However many assets you have in the account, they should be aiding in your pursuit of the most important matters in life, whether now or in the future.

Alright, I need to move my old 401(k), what do I do?

Let’s say for any of the reasons above, you’ve decided you need to rollover (the technical term for moving your account) your old 401(k). You’ve got a couple more questions to ask yourself: How capable are you to find a solution without paying for help? And if you’re not capable, where’s the best place to turn? If you have financial savvy and some time to dedicate the required work and enjoy working with your assets, then you do not need to pay for help. But those three factors found together are rare. Even if you don’t have all those working for you, you’re still not without options. In fact, your most simple, cost effective option is to open an IRA account with Vanguard (whom Warren Buffett recommends). Vanguard has a customer service force ready to guide you through your next steps (beware though, some customer service folks are more helpful than others). However, you are likely part of the 90% (that’s a guesstimate) of people who would gladly pay for some personalized guidance on your old 401(k). It’s great when you can take the burden off yourself. You may not have the confidence, the time, the energy, or the focus to make the right choices with your account. Then I have no hesitation recommending you find and pay for professional help. My only plea is this: know how you’re paying for the advice and know your alternative options. If you do those two things, you will be able to find professional, knowledgable help with your retirement plan account. Okay, so it’s not simple to make a confident decision with how to handle that old 401(k), but by going through the progression I’ve listed above, you’ll gain the confidence this account is in the place that’s best for you.

Book Review: Not Buying It

I try to soak up as much perspective as possible on raising children well because 1) Sara (my wife) and I strive to help our own children become joyful, independent people and 2) Greater Than Financial claims to be suited to help parents do the same through their financial resources, and to back up that claim, I have to stay sharp. So while perusing the library last month, Sara saw Not Buying It in the New Items section, and thought it was a great fit to move to the top of my reading list. Not Buying It: Stop overspending and start raising happier, healthier, more successful kids was written by Brett Graff, a former US Government economist and editor of the site TheHomeEconomist.com. She has one daughter, and much of her advice comes from her own experience, often learning by doing the opposite of what she advises. The book’s subtitle gives a thorough and accurate description of its content. Not Buying It targets parents who believe (or are easily convinced by marketers) in ways to buy an advantage for their children, whether through educational materials, teachers/coaches, food, clothing, or medical care. Graff doesn’t claim spending in those areas don’t have real benefits. Her argument is there are more important factors in creating happy, healthy, successful kids. Many families put too much emphasis on expensive things and experiences, while not emphasizing what’s most important such as time with family and a college education.

The Value

Graff’s writing caused me to consider what Sara and I have spent so far on our children, and for that reason, I got value from this book. In our heavily marketed culture, not spending money at every sale, on every idea, or at every whim doesn’t come natural. Especially when the marketing targets one of our most intense passions: our child’s well being. It takes training (aka hard work) to make wise purchasing decisions. This book helps condition you against being duped by clever marketing and to instead put your resources toward what is truly important to you. To give an example of Graff’s philosophy let’s look at the chapter most challenging to my way of thinking. Chapter 5, titled Your Star, goes after the amount of money parents spend on cultivating their children’s skills and talents.   How many families do you know spend thousands of dollars on training sessions for sports or dance or singing? I know many, have spent on such things myself, and have thought about investing a lot more. The idea is our kids’ skills will translate into a rich college scholarship so it’s a worthy investment, and maybe they’ll even become a professional,  turning their skill into money. But what are the odds that your child will fall into the small group who become a division I or II college athlete, or even a professional? And if they do become a professional, what are the odds they’ll make a fulfilling income? Very few professional athletes get paid like LeBron. And even if they do, they may pay the cost with their long term health. The worst part, if we are honest as parents, is much of our kids’ development is really about us: But while our kids are winning, singing, or starring and we are beaming with pride, a tiny portion of that accomplishment is fueling our own lunacy. That’s part of what drives us to pay for lessons and police the practicing. I admit, I’m already guilty of this with my 5 year old daughter’s piano lessons. I can easily rationalize my insistence as motivated by developing diligence and patience in our girl, but I admit I’m highly conscious of how her piano talent (and work to develop it) reflects on Sara and I. Graff makes more of these points, with some backed by solid research. But other, less powerful points feel as if she added them to fill space. Many of her ideas for alternatives to high spending are already being practiced by the common sense parents I know (cue the cliche about common sense not being so common).

So much for examining alternatives

I don’t agree with Graff’s recommendation to use savings from spending smarter to fund your child’s college education. Her book’s main premise is to buck the status quo purchasing decisions and take up more cost efficient alternatives that are more effective at ensuring our child’s well-being, yet she abandons that philosophy by painting a college education as the holy grail for kids. Here’s the reality: college education is rapidly becoming commoditized. It is not the best path for every child’s well being. For some, it makes a lot of sense, but not for all. If we’re looking for ways to get the most bang for the bucks we spend on our kids, then a college education should be front of the line for scrutiny, not the answer. In chapter 4, Graff makes the case for choosing a public education over a private education, citing studies which show public school as at least on par with private school when controlling for demographics. Yes, private schools have better performance, but the correlation does not equal causation. It’s one of her strongest points in the book. There is no such reference to studies that control for those same type of factors when considering how much value a college education gives. College education vs alternatives needs to be examined by Graff just as public vs private secondary education is. This glaring mistreatment undermines her credibility and makes the book difficult to recommend. I would love to hear a dialogue between Brett Graff and Joshua Sheats, who spoke at length about college education in episode 276 of his Radical Personal Finance podcast, titled Why this financial planner refuses to save money for his kids’ college. I highly encourage you to listen to Joshua dissect the value of college education in 60 minutes.

Should you read this book?

If you have ever uttered the words “kids are so expensive,” then yes, you should read Not Buying It. There is enough content to cause you to examine or reexamine spending on your children and the value they (or you) receive from such expenditures. If you are already highly conscious of the money you spend on your children, this book may not provide you much. There were no ideas I’d consider novel. However, it’s one thing to think you’re spending money with purpose, but another to practice it. For me, I usually err on the side of I’ve got something to learn.

My primary takeaway

Examine everything you spend on. Don’t believe what the world tells you. Do your own research. Especially when it comes to the education of your children, including preschool, primary, secondary, and postsecondary. And finally, spend quality, purposeful time with your children.

Feel the “Paying”: 2 keys to know you’re getting value from your financial person

Every decision you make is based on the value you receive. Take your morning: is the $1 for the coffee worth the warm drink and cascade of caffeine in your system?  Is there value in brushing your teeth for a minute to help ensure dental health and squash morning breath? Is driving 5 mph above the speed limit and risking a ticket worth getting to work 2 minutes earlier? You make those decisions every day with hardly a thought. Other decisions don’t come as natural, such as deciding if your family should get help with their financial plan or investments. Why is it a tough decision? Quick survey: do you know exactly how much you are paying or have paid to a financial services professional when you’ve engaged their services? You don’t, but hardly anyone does. Why does nobody know? Because it’s a pain to figure out what you’re “paying”. But without knowing the cost, it’s impossible to determine the value of financial advice.  So you’ll either skip the advice entirely or simply find the guy (or gal) in the industry you can trust and say “take care of it and spare me the details”.   It shouldn’t be this way. Many people hate on the financial services industry because it’s greedy and deceptive. The hate is often justified. But what’s the solution? According to recent Department of Labor rulings, the cure is government intervention, but such intervention will not come without its own costs. I have a better idea. To improve perceptions of financial services, empower consumers. When a consumer is empowered with good information, they will flee from greedy and deceitful businesses. Consumers of financial advice need and deserve to know what they are paying. They should demand to know what they’re paying. So let’s shout it from a mountain, it’s time to FEEL THE PAYING so families can engage financial advice with confidence. The challenge: the financial services industry would rather not share this information. So it’s no surprise the commissions, fees and expenses are buried deep within the products or services sold. And by buried deep, I mean many advisors themselves cannot quickly ascertain how much of your money is being paid in fees, commissions, or other expenses. But take heart, you are not a hapless victim. To help you determine the value of financial advice for your family and feel the paying, you simply need 2 keys.
Communication
If you want to know the fees, commission, and expenses you are currently paying, your most powerful tool is to ask your advisor. Be sure to watch the advisor’s reaction when you ask about expenses. Does he confidently look you in the eye and maintain calm composure? Does he give you a clear and understandable answer? He should, because as much as fees and expenses mean to a family’s long term financial well-being, the advisor should know the answer to the question and clearly communicate the information to you. Be ready to ask the question about fees and expenses more than once. And if you still aren’t sure you are getting all the information, just sit silently as you consider the advisor’s answers. Silence is powerful tool you can use to get more useful information, or a commitment from the advisor they will work to get you better answers. Still not confident you’re getting all the information you seek? Ask your advisor’s competitors. Call up a competing financial advisor, tell them exactly what you are doing, and ask them to help you figure out all of your fees and expenses. Why would competing advisors help you for free? They see an opportunity for new business if they can show you they could provide more value than your current situation. Still, these solutions still put you at the mercy of the information the advisors know or are willing to disclose. That’s why you need a second key…
Education
Everyone has their own agenda as they publish information, so it’s vital to gather information from multiple sources, not just your advisor. Good news: never in history have you had access to more information from more sources than today. But all that information may overwhelm you, so here’s a quick educational guide for understanding the primary fees you’re likely paying when it comes to financial advice and investing: Product commission: This is a charge based on a percentage of the money put into a particular financial product, most or all of which goes to the salesperson recommending the product. An example is an annuity which normally carries a 7% commission. That’s $7,000 on a $100,000 investment. The salesperson may say that the commission is not paid out of your investment and that you’ll still see your full $100,000 on your statement, but consider two questions: First, if the money doesn’t come from the investor’s investment, where does it come from? The company? But where do they get their money. See where I’m going here? It’s always the investor’s money that pays the commission, however indirectly. Second, can the investor get the full $100,000 back out next month if something changes? The answer is inevitably, no. If you want your money back before a certain period of time, you’ll likely receive your initial investment minus 1-12%, depending on how long you’ve held the investment. Many mutual funds also have commissions. The commission is called a sales charge, and the upfront sales charge can climb up to 5.75% on the initial investment. How much the charge is depends on which share class your money is invested in (A, B, C, R, and I are common share classes) and how much is invested. And because one share class has a lower upfront sales charge than others, it doesn’t mean the salesperson is doing you a favor. If there’s a lower upfront sales charge, you’ll be charged higher exit fees (called contingent deferred sales charges or CDSC) or higher ongoing expenses which leads us to… Mutual fund (and ETF) expenses: Mutual funds often have ongoing fees called 12b-1 fees. A large portion of this fee will go to the salesperson (or their company) who invested you into the fund. It’s also referred to as a distribution fee. To figure out how much it is, do an internet search for your fund and then find the expense ratio. The 12b-1 fee is normally included as a part of the expense ratio. Expense ratios on mutual funds and exchange traded funds (ETFs) can range from next to zero all the way to 2%. Beside 12b-1 fees, the expenses a fund charges goes to the advisor(s) managing the fund and the company that provided administrative duties for the fund. To get more information on these expenses, as well as sales charges on funds, do an internet search with the ticker symbol of your fund and “prospectus” (i.e. XYZ prospectus). Within the first few search results, you should see either a PDF link or a page containing a PDF link to your funds prospectus. Once you have the PDF prospectus, hit CTRL+F on your keyboard (or command + F) to do a document search, then type in any of the following to find what you’re looking for: 12-b, management fees, sales charge.   Transaction fees: This is the cost of buying or selling a stock, bond, mutual fund, or ETF. Sometimes an investor can see this cost directly deducted from their account, and other times it’s absorbed by the fund or the brokerage company and added to the ongoing expenses. Certain custodians will waive these fees if you buy certain funds, especially their own funds. They can do this because they’ll either make money by creating an incentive for people to buy their own funds, or in the case they’re offering another company’s funds, they’ll usually get a kick back (which is very tough information to uncover). Advisory fee: The advisory fee is normally deducted from the investment account managed by the financial advisor. This fee ranges from 0.15% for highly automated advisors (like robo-advisors) to 2-3% for hedge fund managers. A 1% fee is usually thought of as average, however, the average is dropping thanks to competition. Retirement plan expenses: Many of the expenses paid by your company’s retirement plan fall into the categories already listed, but they are worth listing separately because they are often paid by your employer. Sounds good for investors, right? Only if your company has made sure they are getting good value for the expense. If not, that is wasted money that could be added to your account through a higher employer contribution. To determine the expenses on your company’s retirement plan, you may have to dig in the weeds of your plan’s documents, and even then you could come up short of having all the information. Your next place to turn would be your own company’s financial statements, which should list if they are paying a third party advisory firm and how much. Flat fees (hourly or retainer): These fees are normally paid out-of-pocket (by check or deducted from your bank account) as opposed to being deducted from your accounts. These are the most transparent of all the fees listed. There are also numerous books to help you avoid getting duped by high fees. One of my favorites is John Bogle’s The Little Book of Common Sense Investing. Tony Robbins wrote Money Master the Game which contains great information on financial fees, but be warned, he rambles and has some potential conflicts of interest with the advice he’s giving. Two simple keys: communication and education. Those can completely alter the course of your family’s financial plan. Even if you met your advisor at church (or especially if you met your advisor at church), you have to be willing to drill him on commissions, fees and expenses. Don’t be afraid to ask, it could literally be a million dollar question. And educate yourself. You don’t have to become an expert, but basic understanding of the financial fees playing field will empower you and be worth your time. Avoid financial pain by knowing what you’re paying.

Do you know the six greatest words in the English language?

I love everything about these 6 words. They lay at the foundation of my life. And they have a lot to say about your life as well.
The best is yet to come
Those 6 words have 4 attributes which make it profound. First, is what it means for the future. Those words are the epitome of optimism. There’s only one alternative to optimism. And pessimism implies that life is mostly outside of your control, which is a defeated and false way to live life. The second is what those words say about the past, or more appropriately, what they don’t say about the past. There is no implication in that phrase of whether the past we’ve come from was incredible or terrible. Some are thinking “the best better be coming because I’ve already been through hell and back” while others are worried they’ve already used up their good years as if it’s a finite resource. But “the best is yet to come” puts those who’ve been through hell at the same starting line as those who have never felt better. In light of these words, our pasts matter not, there is only our future. The third quality is the use of the word best. The definition gives us all we need to know: of the most excellent, effective, or desirable type or quality. There is no room here for decent, pretty good, or half-heartedness. The best trumps all. The last profound attribute of this phrase is its certainty. The best is coming, there is no might or maybe. If you believe it in the depth of your being, then it becomes your reality. If the best isn’t here yet, it means you simply have to hold on a bit longer, and it will soon arrive. Granted, this will not be everyone’s reality. In fact, many will simply refuse to believe it. My heart breaks for them because I can see clearly what they’re missing out on. And it’s really good. As for me and my family, the “best is yet to come” is our reality which makes it a truth in our lives, and that jazzes me up. But this isn’t just me and my family. You and your family were also created for a purpose. I hope you see that. That purpose often gets lost in this dark chaotic world. Our adventure is cutting through the darkness to win back the purpose we were created for. In the meantime, we don’t need to complicate it. It’s as simple as it’s ever been and it’s as simple as it ever will be. Repeat it to yourself hundreds, better yet, thousands of times: The best is yet to come.