Month: January 2021

Sinking Feeling or Sinking Fund?
photo shows a jar full of coins, a stack of cash, and a small card that says "PLAN"

Have you ever been faced with a large expense for which you were unprepared?  

I have. It gave me a sinking feeling. 

Sinking itself isn’t always a bad thing. The term “sinking fund” originally referred to a dedicated reserve a corporation would set up to repay a debt, contributing funds on a regular basis to build up the needed amount.  

Many individuals have adapted the idea to manage their personal finances: having a sinking fund may help us avoid that sinking feeling. 

This idea came in handy as I recently set out to see how well the sources for my retirement income were matching up with my expenses. My home has a new roof, won’t need another for many years. My vehicles are fairly new; they won’t need to be replaced for years, either. 

But the fact is, someday I will need to pay for a new roof. I will need to replace a car. Furniture and appliances wear out. More predictable but “lumpy” expenses happen, too, like property taxes and planned travel. 

If my budget fails to account for these items, my budget is not really covering all of my living expenses, is it? The answer is a sinking fund, as in these examples. 

  • Home maintenance. If I sink $200 for repairs and such into a sinking fund every month, I would have $12,000 every five years. That should cover a new roof ten or fifteen years from now… or deductibles on storm damage… or a chance to repaint when needed. Likewise, $100 monthly should cover whatever appliances or furniture need replacing: that’s $12,000 over ten years. 
  • Transportation. Piling $350 monthly toward vehicle replacement ought to pile up to enough to buy a car when needed, years down the road. 
  • Annual needs. By adding in one-twelfth of my property taxes and one-twelfth of the annual travel budget each month, my sinking fund should be able to handle most anticipated lumpy expenses, in general. 

I don’t know when the dryer will need replacing—or what else might break!—but I should have the funds to meet the need. And in any of these scenarios, if the balance gets way ahead of likely expenses, I could always pare back the monthly deposit, direct that money elsewhere as I see fit. 

There are different ways to do sinking funds. I set up a monthly automatic transfer into my LPL Financial brokerage account, where the funds will go into an insured cash account until needed. If you would like to set up a sinking fund for your lumpy expenses, email us or call. 

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Don’t Talk About My Friend That Way!

People do love dramas and reality shows, but in real life, it’s not always the jealous neighbor or the loud socialite who spews the worst judgments about us. 

We’re pretty good at doing that to ourselves. 

In our financial lives, it’s easy to slip into judgment. We berate our past selves for not getting organized sooner. We doubt whether our current plan is on track or whether we will be able to handle whatever arrives tomorrow. 

There’s a trick for that. It’s free, it’s simple, and most of us have been practicing it all our lives. 

Be a better friend—to yourself.  

Kristin Neff studies the psychology of self-compassion and puts it this way: “It’s natural for us to try to be kind to the people we care about in our lives. … We comfort them when they’re going through hard times. In other words, most of us are very good at being understanding, kind and compassionate toward others. But how many of us are good at being compassionate to ourselves?” 

Financial freedom isn’t totally about what’s in your pocket. We believe that you can be a good friend to yourself—and you’ll become a better steward of your resources in the process. 

Kindness, common humanity, and mindfulness are the key ingredients in compassionate responses according to Neff. When we give ourselves time to pause and reflect, we can have more reassuring conversations with ourselves—ones that don’t end in self-sabotage or ongoing anxiety. When was the last time your inner voice was compassionate? 

  • “You know, lots of people make mistakes along the way: where can you grow from your past?” 
  • “Of course you get worried sometimes: you care deeply about your family, your legacy, your work…” 
  • “Notice how you’re jumping ahead? Maybe make a note, but then let yourself come back to what you can do right now.” 

Sure: this kind of self-talk isn’t for everyone. If that’s true for you, then try substituting my voice in your head: “Hey! Don’t you treat my friend like that!” And then let yourself off the hook. 

Friends, when you’d like to talk more, drop us a line. 

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Re(balancing) Act
photo shows a golden scale out of balance

We’ve got something that may sound like a riddle at first, but this situation captures an idea that we apply here in the shop. 

Suppose you took some of your money and split it equally between two stocks, both trading at $20 per share.  

Let’s say that after a year or two, one of the stocks rose to $30 while the other fell to $10. 

Another year or two later, they leveled out again, and both stocks were back at $20. But your investment has not been a wash. How? 

It might appear that your holdings are right back where you started. There is, however, a simple portfolio management strategy that can help us take advantage of back-and-forth movements.  

Imagine if you had rebalanced your holdings in the two stocks when one went to $30 and the other went to $10. If you had sold off a third of your $30 stock and put the cash toward the $10 stock, you would wind up having twice as much of the cheap stock as you did of the expensive stock—and bringing both positions back to the dollar amount they were when you originally bought in. 

But now when the high-flying stock gives up its gains, you already took some out, so now the price decrease affects a smaller portion of your portfolio than if you’d held onto all the shares. Similarly, when the depressed stock recovers, you get to enjoy the ride up with more shares than you took on the ride down. 

Using rebalancing, this situation would leave you sitting on a net profit of one-third of your original investment—even though both stocks are back at the same price they were when you first bought them! 

Rebalancing works because it applies the simplest investing axiom: “buy low, sell high.” When you rebalance your portfolio, you are selling a little bit of the higher-priced stuff in order to buy a bit more of the lower-priced stuff.  

Trying to “time the market” is a fool’s errand; rebalancing takes the guesswork out and turns it into a matter of arithmetic. 

As always, there are no guarantees: in the above scenario, if the cheap stock kept going down from $10 to $5 and the expensive stock went from $30 to $60, you would look awfully silly (… although not as silly if you had sold out of the one entirely!). 

Stocks do not go up forever or down forever: We generally expect a lot of back and forth. By taking on the risk of missing out if there ever is an extended period without back and forth, we have a chance to use the back and forth to our advantage. 

Clients, when you have any questions about what this means for you, please call or write. 

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. 

Investing includes risks, including fluctuating prices and loss of principal. 

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What To Do with Stupid Questions
photo shows room of business people with hands up to ask questions

For a lot of people, there is nothing scarier than raising their hand—in the classroom, in the boardroom, wherever. 

“What if I ask a stupid question? Everyone will think I’m totally lost…” 

“What if what I’m asking for is outrageous? Everyone will think I’m greedy, delusional…” 

We’ve known plenty of teachers who trot out the old line that “there are no stupid questions.” Our fear of judgment, of facing what we don’t know, of owning our dreams—that feels way more real than pretending that no one will judge us. 

Sometimes, though, we are our own best foil. We talk ourselves out of what we want before we even let ourselves say it out loud! We go into negotiations muzzled by our fear, so we ask for less than we want. We refuse to raise our hand, so we never get the answers we need. 

But we’ve got a trick for this, and we practice it in every conversation. Whether we’re working with each other on the staff, with you, or with our friends and colleagues at LPL, we wield a powerful tool that can defeat any stupid question. 

Curiosity.  

Curiosity is by far the best treatment for that fear: you just have to let yourself be more interested finding solutions and gaining understanding than you are afraid of how you look. 

And clients, we think it applies to you, too. When we work on your financial plans and planning, honest answers take us farther. Where are you headed? What are your dreams? What ideas and questions do you have? 

Why lowball our goals before we even get to work on them? Let’s give them a fighting chance. 

Clients, when you’re ready to talk about this or anything else, write or call. 

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Can One Redeem All?

photo shows coupons

As value investors, we have always treasured the opportunity to buy shares at favorable prices for companies we deem to be durable. For many companies, 10 times the annual earnings per share looks like a bargain to us!  

In the recent market turmoil, these kinds of opportunities appeared again. The arithmetic of these situations is interesting: an investment might compound to three times its beginning value over 10 years or so if the company is making annual profits of one-tenth the share price and earnings keep up. 

No guarantees, of course. We could be wrong in our judgment, or some problem could befall the company and upset the theory.  

But suppose shares are purchased in three such companies. If only one pans out as hoped over the 10 years or so, it may be worth triple the beginning value. If the other two are worth nothing, then the combined value of the three may still hover around the original value, as it was 10 years before.  

One could redeem all. 

Better yet, a company that delivers steady earnings over 10 years might be valued at 15 or 20 times earnings in the future instead of just 10 times, based on the steady earnings record. That valuation change might produce profits in addition to return of the original investment. 

Well-known grocery chains, health companies, and food processors may be a fit for this strategy. We cannot know the future, but we believe all these companies will survive—not just one out of three—with the possibility of real gains.  

But even if only one proves durable, that one may redeem all. 

If you are ready to talk strategy as it relates to your goals, please email us or call.

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Feeling the Burn and Staying Fresh: One Sneaky Benefit of Stress
photo shows a pair of hands tying shoelaces on a tennis shoe

My reading habits, always eclectic, have gotten a lot of exercise during the pandemic. I just read about an interesting health phenomenon, one that illuminates the things we like to talk about here. 

“Autophagy” is the body’s way of recycling older or damaged cells and doing cleanup and maintenance. It seems to promote regeneration of new, healthy cells. The stresses of physical exertion and fasting are known to trigger increased autophagy, a sort of survival mechanism. 

What could this possibly have to do with investing? 

We recently chose to take advantage of a volatile day in the stock market to clear out a few holdings. It was cleanup and maintenance. Those sales freed up money with which to invest in newer ideas and opportunities.  

Just as stresses trigger autophagy in the body, market volatility and economic change tend to trigger cleanup and maintenance in our portfolios. 

Autophagy is believed by some to be a sort of an anti-aging process, keeping the body younger. Likewise, with our portfolio management, we strive to keep our holdings fresher, more in tune with the times. “In shape.” (No guarantees, of course. Autophagy does not guarantee perpetual youth, and our work does not guarantee returns.) 

When you are ready to talk about the health of your portfolio, call or email us. Let’s talk.

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