Hugh Wynn's Two Cents

While I'm not an investor by profession, I have been curating sound personal financial habits and practicing those techniques since I was a youngster. Although the focus of this blog is on our three youngest generations, I will ceaselessly emphasize to all investors the importance of an early and routine savings habit, a common sense buy-and-hold strategy, a diversified investment portfolio, the wisdom of shunning market timing, and a “stick to your guns” attitude regardless of negative outside influences. I believe it is imperative that you keep your investment strategy simple and your investment costs as low as possible. Like the small investor’s best friend, Jack Bogle, was quick to remind us, “In the fund business, you get what you don’t pay for.”

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past Posts

The Sad State of Finance Ed
October 15, 2020
Unfortunately, without a working knowledge of personal finance, young adults are likely to lead a completely different life than someone with personal finance knowledge.
READ MORE
Pandemic Low Interest Rates
October 8, 2020
The Federal Reserve seems to be signaling that short-term interest rates will remain a fact of life for, perhaps, years to come. Wise? Foolish? Time will tell.
read more
Day Trading During the Pandemic
October 1, 2020
The volatile pandemic stock market has drawn new day traders into its seductive embrace by the millions. Tney are mesmerized and ncentivized by no-commission trades, boredom in lockdown, and by a phoenix-like recovery from the depths of the March 2020 stock market debacle.
read more
Beating the Market Ain't Easy
September 24, 2020
By investing in index funds you surrender your quest to be on top of the market, knowledge-wise. Daring to compete on behavior versus talent is not an easy thing to do.
READ MORE
Pandemic Pins 'n Needles
September 17, 2020
It’s a fair statement to suggest that younger people – Millennials, for example – have suffered some particularly catastrophic economic hardships in recent years.
READ MORE
The Sad State of Personal Finance Education in Schools
October 15, 2020

A recent Wall Street Journal “Letters To The Editor” missive by John F. Quilter caught my eye, which I will quote verbatim… except to add that Quilter’s suggestion should apply to all U.S. high schools, public and private, not just those in California:

California [all] schools could better educate and prepare their students for adult life if they ... introduced a mandatory course in personal finance covering such topics as managing credit, investing in fixed-income and equity instruments, managed funds and index funds, mortgages, insurance concepts, retirement accounts, income-tax matters and a host of other topics they will have to deal with as adults. This becomes even more important as Social Security becomes ever more shaky and defined-benefit pension plans fade away.

Is anyone paying attention? Apparently, not many.

According to the 2018 Survey of the States: Economic and Personal Finance Education in Our Nation’s Schools conducted by the Council for Economic Education (CEE), only 17 states required that high schoolers take a personal finance course. Since then only four additional states have been added to that list.

DOWNLOAD IT HERE

Unfortunately, without a working knowledge of personal finance, young adults are likely to lead a completely different life than someone with personal finance knowledge. Living paycheck to paycheck is a common trait of those without such knowledge. Personal finance training provides young adults with the knowledge and understanding to make smart money decisions… gain more control over their own lives… attain more empowerment to do those things that matter most to them.

Are parents or guardians of these young people paying attention to this lack of training? You should be. A member of your local Board of Education probably lives nearby – perhaps next door – might even be sitting on your living room couch watching TV. Bend an ear. Exert some pressure. Your kid will be glad you did.

Interest Rates: How Low Can They Go?
October 8, 2020
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” --- Charles Dickens

The Federal Reserve seems to be signaling that short-term interest rates will remain a fact of life for, perhaps, years to come. Wise? Foolish? Time will tell. But what does a lengthy period of near-zero interest rates mean to folks in the here and now? Well, like most things, it depends.

WATCH VIDEO

Predictable Patterns

The 10 Year Treasury is the benchmark used to decide mortgage rates across the U.S. and is the most liquid and widely traded bond in the world. The current 10 Year Treasury yield as of September 21, 2020 was 0.68%. On September 21, 1981, it peaked at 15.68%. Except for its recent plunge, the 10 Year Treasury posted its lowest rate of 1.46% on July 25, 2016. Currently, interest rates are at levels not “enjoyed” for over 50 years. Predictably, low interest rates encourage folks to buy homes or refinance old mortgages carrying higher rates of interest. In the current environment, mortgage rates will likely remain low.

This should be a benefit to home builders as well as to families either downsizing or cashing in home equity for retirement purposes. Low rates have already spurred major refinancing - an activity that will run its own course in time – and also because many banks are setting refinance rates higher than that for mortgages. It stands to reason that folks with excellent credit will benefit the most from low interest rates. But if lending institutions as many predict tighten lending practices, those viewed as credit risks will be left with fewer options to finance their endeavors.

Costs and Benefits

Those among us who save, invest, and occasionally lend, could both benefit AND suffer in a persistent low rate environment. The more well-to-do savers…those most likely to lend to lend to entrepreneurs…will have less incentive to do so, increasing the difficulty of risk takers to find backers for their bold new ideas. For older folk, it could mean delaying retirement and for younger adults, delaying or bypassing higher education. Equity investors could benefit as conservative bond holders among us seek higher yields elsewhere, providing additional support to the stock market. In short, it really depends on where a company, a family, or an individual falls on the financial continuum.

Some Will Suffer

Those risk-averse holders of cash or folks who traditionally hold assets that produce a steady income stream (i.e., retirees) will likely suffer in this low rate environment. And folks who invest in what I call “shifting asset accounts,” like 529 education funds and target-date retirement funds that reallocate to bonds as college or retirement milestones approach, will experience lower yields, and thus less income from those assets.

These diminished streams of income will inevitably encourage investors to consider tradeoffs. Due to lowering rates, if a 529 account does not generate sufficient funds to send a child to college, should that child’s education be delayed? If not, are other funding opportunities available? Will parents consider less expensive colleges and universities viable options? Are low-interest student loans available? If so, are they financeable?  Delaying the education of a child comes with its own set of opportunity costs…primarily the loss of incremental future earnings.

Delaying retirement – whether early or not – may be an even bigger issue because of the sheer numbers of people involved. It’s virtually inevitable that people will be saving (and earning) less money in 401(k)s, 403(b)s, 457(b)s, IRAs, and other retirement vehicles…or perhaps having to take Social Security benefits earlier than planned, reducing long-term inflation-adjusted monthly income for life. Without question, those dependent on interest income or who planned on interest income being a significant part of their cash flow for whatever reason, will suffer from an extended low interest rate environment.

Silver Linings?

Aside from reduced mortgage and refinance rates in housing, where might we look for silver linings? Will credit card interest rates drop? Millions of folks are dependent on credit cards to get them through unexpected cash crunches; thus, reduced credit card rates would be a Godsend…if  they happen. But experts predict “perhaps down a little, but not likely much.” Financial institutions are very hesitant to reduce credit card rates due to the traditional high loss factor. In light of that, low interest rates in general might actually motivate folks to create or beef up their emergency funds instead of relying too heavily on credit cards as a fallback position. Those who already park cash in such easily accessible accounts will be quite comfortable with Rainy Day fund rates, which are typically held in low-yield accounts.

A low interest rate environment will likely tempt folks to assume more risk in their investing. Many believe, including me, that today’s strong market is in no small part the result of people chasing yield…often without being mindful of the associated risk. A Fed-induced low interest rate environment, in addition to helping the federal government finance its staggering debt, is designed to encourage us to spend more and invest in riskier assets. Low rates induce that sort of behavior.

Vulnerable Retirees

Probably those who are most vulnerable to the negative impact of a low interest rate environment are retirees or those approaching retirement. Historically, this risk-averse group has relied more heavily on investments in bonds or bond-like instruments for income. Loss of those once-comforting bonds yields, the replacement of  company pension funds by employee-directed 401(k)s, etc., and the looming threat of reduced Social Security benefits have been reinforced by Fed action in recent years and is expected to continue for the foreseeable future.

Pandemic Day Trading is not all Glitz, Glamour and Easy Money
October 1, 2020

The volatile pandemic stock market has drawn new day traders into its seductive embrace by the millions. They are mesmerized and incentivized by no-commission trades, boredom in lockdown, and by a phoenix-like recovery from the depths of the March 2020 stock market debacle. Along with the glitz and glamour, many new traders are learning important lessons. WATCH THE VIDEO

Hard Lessons

Hard Lesson #1: Markets don’t always go up.

Hard Lesson #2: Each non-retirement account transaction is likely a taxable event, and in the case of successful traders, Uncle Grabby’s IRS is waiting for its cut.

In short, a day trading enthusiast must not only be a “savvy” trader, but an individual knowledgeable in certain provisions of the U.S. Internal Revenue Code, as well. Did I hear you ask why?

Taxable Gains & Losses

Well, here’s why. When trading in taxable accounts, each trade is likely to generate either a taxable gain or a loss that can offset a taxable gain if one exists. Those off-setting losses can be particularly important, and, yes, they do happen. The “savvy” investor will quickly learn to optimize after-tax profits by timing when to sell both winners and losers – or by selling one lot of a particular company’s shares instead of another lot. We’ll talk more about “lot selling” later. First, some fundamentals.

Year-End Results

As a “silent partner”, Uncle Grabby is not particularly interested in how much you gain or lose on a specific transaction. Rather, he wants to know the net result of your total transactions at year’s end.

Arriving at that number begins with figuring the gain or loss on a specific sale by subtracting the asset’s purchase price (plus odds and ends) from the sales price. The net is your gain or loss on the sum total of those transactions. Logically, if a trader’s gains exceed losses, a capital gains tax is owed. If losses exceed gains, no tax is due.

Credit For Losses

Because Uncle Grabby is a generous old dude, in the case of a net loss he will allow you to deduct up to $3,000 against ordinary income earned in that same year. Sad to say, not infrequently day traders’ annual capital losses exceed $3,000 in which case they can carry forward the excess to first offset capital gains and then up to $3,000 of ordinary income in future years until the losses are exhausted.

22% Tax Rate

Day traders usually aren’t eligible for the lower tax rates that apply to long-term capital gains – investments held for longer than one year. Long-term capital gains tax rates are 0%, 15%, and 20% depending on an individual’s income. The net profit of a day trader’s transaction is typically short-term in nature and taxable at the higher rates used for ordinary income… often 22% or more. This is an important distinction when deciding to sell shares of the same stock bought at different times and prices.

To minimize taxes, it makes sense to sell the stock with the least capital gain considering both the net margin (gain or loss) and whether or not it is short- or long-term. Of note, should the investor not specify which lot of a particular stock is sold, the default movement from inventory is typically first-in, first-out (FIFO).

Trader Tax Break

Thanks to Obamacare, there is a 3.8% surtax on net investment income above certain earnings thresholds, and some states have high income tax rates and offer no reduced rates for capital gains. Countering those tax considerations is a tax break available to some day traders who claim that trading is their business – not a sideline gig – and are able to deduct certain expenses (home office and related expenses, computers, tax preparation, etc.) on Schedule C of their tax return. Uncle Grabby’s requirements to gain these benefits are rigorous, involving certain numbers of trades per year and hours of trading per day and week.

Not Easy Money

Although the current volatile market and ease of entry has gained the attention of millions of folks, it’s probably not for the uninitiated and it’s not easy money. Markets do fluctuate, and to be sure, Uncle Grabby is a most willing participant in sharing your winnings. So be aware of the tax angle.

Because I am a persistent and conservative index fund investor, I will again remind my audience of another approach… the PDQ Principles of investing – an approach built around index fund investing that involves purchasing (on a dollar-cost average basis) low-cost, highly diversified, quality products and then exercising a boat-load of patience while letting the Amazing Power of Compounding work its magic.

Be diligent in your trading and good luck.  

Trying to Beat the Market is Futile - and Fleeting
September 24, 2020

By investing in index funds you surrender your quest to be on top of the market, knowledge-wise. Daring to compete on behavior versus talent is not an easy thing to do. But it gets easier when rewards for this humility begin to appear – once your focus on behavior (discipline) leads to improved success in managing your portfolio.

Can't Beat 'Em

Beating the market is extremely hard to do. Accounting for what’s known as “survivorship bias” (the attrition rate of poor performing mutual funds), over a recent 15-year period, roughly 92% of large-cap funds lagged the yield of a simple S&P 500 index fund. Mid-cap and small-cap funds lagged their benchmark indexes even more - roughly 95% and 93%, respectively. In short, the odds that you’ll do better in an actively managed domestic fund (versus an index fund) are about 1 in 20. That’s why I dared to be average years ago!

Certain “friends” suggested that, in my case, being average probably came quite naturally. And I agree. I’m not the proverbial sharpest knife in the drawer, but I am very disciplined when it comes to investing. The professional investors I have to compete with (I call ‘em Wazoos) are very smart, very hard-working, and they number in the thousands. How can I expect to match up with this brainy crowd in time and effort spent?

A Slight Edge

An index fund simply seeks to match the performance of a stock index (e.g., the S&P 500) by buying shares in all of the companies in that particular index. Studies show that index funds beat the vast majority of actively-managed funds over time in large part by keeping the costs of investing low. I particularly love that feature, but it’s not the main reason many small investors like myself gravitate toward index funds. Finally, we have a tool that plays to our strength – in my case, at least. Its separates behavior from the Wazoos’ superior knowledge of the marketplace. In short, it gives small investors a slight edge, daring to be average, as opposed to working their collective butts off trying to compete with the talented Wazoo crowd.

Average is "In"  

Next to saving, one of the most difficult results to accept as an investor is daring to be average. But it’s an index fund’s essence…its basic fundamental. Think about it, if you invest in a Total Stock Market Index fund, or less broadly, an S&P 500 Index fund, you’ve deliberately chosen to be satisfied with the broad market’s yield. “Why,” you ask, “would I want to just be average?” Truth be told, you’re not just being average. Study after study of index (passive) fund results show that over time, they outperform managed (active) funds. And those occasional fund managers that outperform index funds aren’t necessarily the same fellows and gals year-in, year-out.

In short, today’s hero could just as easily be tomorrow’s scapegoat.

Do Nothing

What you soon learn is that doing nothing is often the best practice once you’ve established a pattern of regular investing (i.e., dollar-cost averaging) into appropriate index funds (occasionally adjusting for risk as circumstances change). Like John Bogle and other conservative icons have so often commented, “Don’t just do something, stand there”. Of course, many Wazoos will recommend that you do just the opposite. Gotta keep those transactions (fees) flowing. In short, they often advise, “Don’t just stand there, do something”.

Hard Lessons

After throwing in the towel on time and effort, I soon discovered that I was equal to the task when it came to patience and discipline. Call it being lazy. Call it daring to be average. Call it what you want, but I learned some valuable lessons in the early 80s. Being part of the thundering herd didn’t appeal to me. As a part-time, break-even kind of investor… an amateur… I had to find a new gig to stay in the “yield” game with the Wazoos. That search led me to John Bogle’s Vanguard and his, at the time, much maligned index funds. Life quickly improved – became less stressful and certainly more rewarding.

Hocus Focus

What I’m suggesting is that once you’ve dared to be average by dollar-cost averaging into index funds, your remaining and constant challenge is to focus, focus, focus on your behavior pattern – be better than the Wazoos at doing nothing. And it ain’t that easy being patient, folks! Doing nothing while a Bear Market is nipping at your butt goes very much against human nature’s survival instinct.

I’m proud to say I stayed the course during both the Great Recession of 2007-2009 and today’s Covid-19 Recession. I endured those major downturns, plus others, by doing nothing except continuing to invest the same amount of money in the same funds on the same day of every month (I’m crossing my fingers about the Covid-19 affair… it ain’t over yet).  In any event, those cheap units patient investors acquire during the bad times do wonders for portfolios during recovery. Admittedly, it wasn’t always pleasant reviewing my monthly statements during those grim times, but I still have a few strands of hair.

However, a couple more fell out this past week.

The Pandemic has Millennials on Financial Pins 'n Needles
September 17, 2020

It’s a fair statement to suggest that younger people – Millennials, for example – have suffered some particularly catastrophic economic hardships in recent years. VIEW VIDEO

Catastrophic Economics

Studies show that Millennials – those born 1981-1996 and now in their mid-20s to late 30s – have accumulated much less wealth than their parents and grandparents had at similar stages in their lives. This could be attributed to those catastropic economic hardships. Case in point is the older group of Millennials whose financial short straws started being drawn during the recent Great Recession that began in December 2007 and ended in June 2009. Having already suffered a less than ideal job market during those years, they and their younger cohorts are now being battered by multiple Covid-19 pandemic torments… if not the virus itself, a job loss, a pay cut, a temporary layoff, a loss of health insurance, etc. “What to do?” they might be heard muttering.

Pandemic Pins 'n Needles

An obvious first thing to do in the instance of job interruption or loss is to determine your eligibility for unemployment insurance, and if eligible, to apply. The CARES Act signed into law in March 2020 provided pandemic-related unemployed workers with an additional $600 per week on top of regular unemployment benefits, but that ended in July and has yet to be renewed by Congress. However, the President signed an August 8 executive action partially restoring the lapsed $600-a-week unemployment supplement. Under this edict, the federal government is providing unemployed workers an extra $300 in weekly payments. Forty-four billion dollars from FEMA’s Disaster Relief Fund is being used to finance the benefit until it's exhausted.

Confronted with job losses, Millennials must consider where they can save the most – perhaps in housing by moving in with family or renegotiating rent or lease payments with a willing landlord. Failing that, it then becomes a matter of prioritizing rent and mortgage payments with groceries, utilities, and other essentials.

If you still have a job but haven’t yet started an emergency fund, start one if at all possible. Rainy Day funds represent a firewall against both unexpected financial challenges and against having to interrupt long-term retirement savings plans.

Debt Conundrum

Along with credit cards and mortgages, many Millennials still face the prospect of paying off those pesky and burdensome student loans. Because many lenders have programs to help debtors address financial difficulties, now is the time to discuss “revised” payment options with them. If student loan deferrals or mortgage refinance opportunities are available, resultant savings might be redirected into a Rainy Day fund. Whatever you do, don’t fail to address these financial problems head on. To those fortunate enough to have long-term savings, if possible, avoid raiding these valuable retirement accounts to pay off debt. But don’t let debt pile up that will plague you for years to come. Therein lies the conundrum.

Retirement Life Raft

If your financial woes are attributable to Covid-19, and if you have a retirement plan and all other sources of financial relief have been exhausted, under terms of the CARES Act, you may qualify to withdraw up to $100,000 from retirement accounts through December 2020… without penalty, if under 59½ years of age. Personal income tax will be due on the amount withdrawn, but it’s payable over the following three years. Such a distribution could be paid back anytime during that period and a tax refund claimed on any taxes already paid. This withdrawal option should be avoided if possible because of its potential negative impact on future retirement plans, but folks must occasionally do what they have to do during sudden financial setbacks in their lives.

Skill Redux

If a temporary layoff becomes permanent, this might be the time… call it an opportunity… to learn a new skill or enhance existing qualifications that might help land a new job. Online courses are readily available and new skill sets might be gained by doing different types of part-time work. You might even consider going back to school to train for a career in a promising “new” industry as opposed to one decimated by the pandemic or technical obsolescence. In short, acquiring new skills, building new relationships, and focusing on developing trends will put you in position to grab emerging opportunities when presented. Broaden your thinking and focus on these new challenges. By the way, developing these sorts of outlooks are good even in “normal” times.

Financial Wellbeing

Managing your financial wellbeing, particularly during hard times, can be incredibly stressful, but carefully monitoring your credit is especially important in your overall financial wellbeing. Because current personal financial dilemmas are so widespread, the three top credit agencies – Equifax, TransUnion, and Experian – are all offering free weekly access to credit reports through AnnualCreditReport.com.

If you need career advice, reach out to family, friend, and workplace networks for trustworthy help. Thousands of people are currently dealing with serious financial circumstances, and it’s highly likely that someone in your circle will be more than willing to provide advice or encouragement in this time of crisis. Help is out there. Go for it.

And remember: This, too, shall pass.