It is time, yet again, for the monthly airing of my private financial laundry. My hope is that maintaining a journal of my savings will help provide additional motivation to save and allow me to spot trends. It will also serve as a record, so that I can look back an analyze trends. I also try to throw in some personal finance observations with each post.
All of the prior updates in this series are available on the Savings Diary page. The first, I’m Just Saving…Personal Finance Diary kind of provides the “origins story.”
This month, my portfolio took a dip, due to my ten year anniversary and the sell off in foreign stocks. As I have mentioned before, I am overweight ex U.S. stocks. See Media Pin of the Week – More GMO, Weekly Media Pin – Grantham on Graham, Best Foreign Value Factor ETFs, Resource Roundup: More CAPE, and Foreign Value Factor ETFs Update.
I have about 50% of my liquid assets allocated to foreign stocks. The EAFE index (foreign developed ex-Canada) was down about (1.25%) last month. The MSCI ACWI (all world) index was down about (1.88%). So that probably cost me about $1,500 last month.
In addition, ConAgra Brands (“CAG”) announced an agreement to acquire Pinnacle Foods. While analysts and the press seem enthusiastic about the deal, CAG is diluting my shareholdings and sold off about 8% on the announcement. I am planning to write a post about the deal wherein I will try to determine what, if anything, to do with my position.
One thing is for certain, the high percentage of mergers that are failures from a financial perspective and a healthy respect for the behavioral motivations of most managers to run a bigger empire (at the likely expense of their current shareholders) leads me to view acquisitions skeptically (especially, so called “strategic” mergers – those without a primary financial impetus).
In my view, mergers generally are not an exciting endeavor to build a bold new competitor. More likely, an acquisition is a mechanism for pissing away some of the shareholders’ equity to enlarge the domain of managers and to pay transaction fees. Still, I want to be deliberate and thoughtful about any moves. Writing a blog post on the subject will potentially help me to achieve that.
Not to bury the lead, but I also spent $10,000 on my 10th wedding anniversary. I basically gifted the money to my spouse to use however she wants; but she’s sort of in the market for a car. So, she will probably be able to get something pretty ok with that and the trade-in/proceeds from her current car.
All that being said, let’s get down to it:
In our last episode (end of May) I had worked up to about $184,000. As a reminder, I only include liquid investments in these monthly figures, as I don’t think it is very helpful to start marking my real estate and other illiquid assets monthly.
As of the end of June, I am down to a little over $174,000 in investments. So, I took quite a hit last month. I contributed about $2,700 to my investment accounts in June. Thus, factoring in the $10K gift, it seems my contributions pretty much offset the price depreciation in my investments. I also got some pretty big dividends to help offset the price declines as foreign stocks/funds often make their largest annual distributions at the end of June. Also, foreign stocks currently yield more than U.S. stocks due to valuation (or sector/industry weights depending on who you ask, of course they also cite that for the valuation discrepancy. Also ~60% of historical equity returns come from dividends, so getting more material dividends is kind of “the deal” with buying cheaper stuff.
I should get three paychecks (with attendant 401(k) and HSA contributions) next month based on our biweekly system. One of those is already en route but it should count in next month based on the date it will go into the market/account. I also will probably have some extra cash to contribute in July as there was no 457 contribution for June. So I am kind of setting myself up for a bounce back next month (absent market movements).
Tax Stuff
As I noted before, I use tax incentives as extra motivation. I try to lightly hit tax issues on this site as I feel like I should save whatever insights I have in that arena, humble though they may be, for my clients.
However, I read an article (click-bait) on the web this week stating that savers should “be careful not to over save in pretax accounts.” The author simply talked about RMDs and the fact that your income will be taxed at ordinary rates in the future (the article also had an erroneous example, which failed to account for the standard deduction). Then the author quoted a financial advisor who touted Roth and taxable accounts. I’m sure you’ve seen similar articles.
For the vast majority of working stiffs, prioritizing Roth or taxable accounts is probably bad advice. I personally do not plan to really allocate to Roth (or other after tax accounts) until and unless I get my income down into the lowest bracket or get well above $1 million in pre-tax accounts.
Even in the lowest marginal bracket, it wouldn’t be a no-brainer because there is likely to be a tax free income allotment in retirement. For example, in 2018 (MFJ filing status) one would have a $24K standard deduction to absorb prior to even getting into the 10% bracket (from $0-$19,050). No one knows what future rates will be, but it seems unlikely taxes on low incomes are going to go dramatically higher.
If I distributed 4% of my $1,000,000 pre-tax account in 2018 ($40,000), I would get $24K tax free and the remainder would be at the 10% federal rate. That’s not even factoring in the ability to “retire” to Florida or another state without income tax. There are some good discussions of this point on The Millionaire Educator blog.
Also, I really weigh the “bird in the hand” more than “two in the bush.” All else being equal, and given the many uncertainties, it is hard to argue for passing on a current tax benefit based on projections far into the future. You could maybe make an argument if you are in one of the lower brackets given the recent tax cuts, but it is still tough. Here’s a good break down of the Roth versus traditional analysis from the MadFientist blog. The discussion is in the context of IRAs, but the logic would apply equally to other accounts.
One other point is that many commission-based “financial advisors” (and even those earning a flat fee on assets) are going to have a potential financial incentive against advising you to put all your money in your 401(k), as they have no chance to earn current fees on that money. Run your own numbers, but I would be skeptical of those touting Roth or taxable accounts over pretax for middle-class (or FIRE) types.
Fin
In sum, I plan to hammer the pretax accounts until and unless my taxable income is lower (in the 12% federal marginal bracket, at a minimum) and/or I have really significant amounts of assets in my pretax savings accounts. I should get three contributions into my pretax accounts next month, so hopefully my balances will start to really bounce back strong.