Aug 29, 2021

Proverbs for Today

During the turmoil in the U.S. the last several years, I have occasionally taken a fresh look at what people were saying, regardless of how little sense it has made to me. The commentary I struggle with has come from both sides, left and right, and all generations.

For example, Modern Monetary Theory violates everything I’ve ever thought regarding government finance. From the right, it’s still hard for me to realize that behind Trump’s personally offensive behavior, he actually had some policies that were broadly supported, such as extricating us from a decades-long war in the Middle East.

We have the cancel culture telling us there’s only one right opinion on their subjects. Tucker Carlson, a brilliant media marketing person, is working to out-do Trump, and the Squad torments even Nancy Pelosi. We have people who don’t think vaccines are safe or needed and believe that more people pulled a lever for Trump than for Biden. And the world is consumed by a pandemic that has made many of us lose track of some basics, such as time.

And for a while it seemed that lynching blacks was going to once again be acceptable behavior.

In the mix, Me Too and Black Lives Matter have both gained momentum while too many accept our holding immigrants in cages. Equality and identity politics have become the rallying cry for everything, both concepts that have little history of driving cultures.

In my ponderings, I wondered what Proverbs would have to say about my struggles. So I read the book, along with some additional commentary. Assuming for a moment you won’t consider writings from thousands of years ago fake news, today I’m sharing my experience with this ancient book. My observation is that it has a lot of good advice for anyone - any religion or not, any political persuasion, any country, any time. Here’s what I learned.

A proverb is a short, traditional saying, often in metaphorical form, that expresses some obvious truth or familiar experience which may be applied to common situations; an adage; a maxim.

Examples include “a path is made by walking,” or “be swift to hear, slow to speak.” “Haste makes waste.” “Practice makes perfect.” “A penny saved is a penny earned.” Or from Afghanistan, “You have the watches, but we have the time.”

The first proverbs came from Egypt about 3000 B.C. About 600 years later Ptahhotep, an Egyptian minister, attained high repute for his wisdom. He wrote the first known piece of Egyptian wisdom literature, “The Maxims of Ptahhotep.” It is possibly the oldest known book in the world. This Egyptian "wisdom literature" was meant to instruct young people in appropriate behavior, with speculations about the very worth and meaning of human life.

Wisdom literature is universal among more advanced cultures, including Egypt, Sumeria, Babylonia, Persia, India and Israel. It was pervasive throughout the ancient east.

The most famous examples of wisdom literature are found in the Old Testament, including Proverbs, but also Job, Psalms, Ecclesiastes and Song of Solomon. I grew up with the protestant Bible and have read it most of my life.

Proverbs are probably the oldest existing documents of the Hebrew wisdom movement, generally attributed to Solomon. Both the Jewish Bible and the Quran consider Solomon a prophet, and a wise and famous king of Israel, dating to the 10th century B.C.

Proverbs is put together from numerous independent collections around the 4th or 5th centuries B.C. Its earliest collections came into being about 700 B.C.

The word proverbs comes from the Latin word proverbium, “a common saying, old adage, maxim.” It literally means “words put forward.” The Latin comes from the Greek, pro,which means “forth,” which is derived from the Proto Indo European (PIE) language root per, meaning “forward, in front of.” Verb is from Latin verbum, “verb” or “a word,” from the PIE language root were, “to speak, say.”

About half of Proverbs is short, catchy sayings implied by the English word, proverb. But the other half is made up of longer poetic units of various types. These include "instructions" formulated as advice from a teacher or parent addressed to a student or child; dramatic personifications of both Wisdom and Folly; and the "words of the wise" sayings.

Proverbs is composed of 31 chapters, divided into several distinct sections, each section sometimes its own collection of wisdom literature. The first nine chapters are an invitation to the young to take up wisdom as a model for a successful life. The next thirteen chapters, the bulk of the book, has hundreds of sayings, often contrasting the wise person with the foolish person.

The third section (three chapters), titled the thirty sayings of the wise, appears to be a facsimile of an Egyptian wisdom text written by Amenemope (“The Instructions of Amenemope”), dated to 1250 B.C. The fourth section picks up from the second section, focusing now on social awareness, contrasting the just and the wicked, and the rich and the poor.

The final section (five chapters) is attributed to Hezekiah, who according to the Hebrew Bible was a famous king of Judah around the 8th century B.C. The remainder of the book is a mix of appendices that cover a multiple of random subjects.

So what does Proverbs have to say for today? I looked through the current issues plaguing the U.S. and address three areas: prudence, justice and temperance.

Prudence

Prudence is the importance of wisdom, discipline and reason. Today, we see a country that seems to have left these traits behind, whether instant gratification, avarice, debt, dishonesty, foolishness or general disregard for inner human qualities.

Proverbs first challenges us to seek wisdom versus folly. It asks again and again, “Do you see persons wise in their own eyes? There is more hope for fools than for them” (26:12). “The wise lay up knowledge, but the mouth of a fool brings ruin near” (10:14). I wonder where the anti-vaxxers lie on the wisdom-fools continuum?

Or the notion that we can borrow our way to prosperity? If this is such a great idea, why didn’t we do it centuries ago? (Countless countries have tried, and for the most part failed miserably.) Does anyone but a fool believe our recent election was “stolen”? If so, by whom?

“Do not answer fools according to their folly, or you will be a fool yourself. Answer fools according to their folly, or they will be wise in their own eyes” (26:4-5). We would be wise to answer today’s fools accordingly.

The wisdom of Proverbs doesn’t say we’re all equal, a common notion of modern society. Instead, it says that “One is commended for good sense, but a perverse mind is despised” (12:8). Or “A wise man is full of strength, and a man of knowledge enhances his might... Wisdom is too high for a fool; in the gate he does not open his mouth” (24:5-7). Or “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty” (21:5).

Think buying things you can’t afford. Hasty comes only to poverty, says Proverbs. “How much better to get wisdom than gold! To get understanding is to be chosen rather than silver” (16:16).

And finally a word to those who see debt as their ticket to freedom: “The borrower is the slave of the lender” (22:7).

Instead, today, we have an abundance of people who value those who talk over others, whether our leaders or our media. Proverbs has plenty to say to them: “To watch over mouth and tongue is to keep out of trouble” (21:23). “One who spares words is knowledgeable; one who is cool in spirit has understanding. Even fools who keep silent are considered wise” (17:27-28). “The mind of one who has understanding seeks knowledge, but the mouths of fools feed on folly” (15:14).

Shame, mouths of the wicked, babbling fools, perverse minds, mouths of fools, folly, haste. I see too much of it in our society.

Justice

Proverbs speaks clearly in support of justice, including social justice, and despises injustice, depravity, decadence and laziness. This includes respect for righteousness, harmony, charity and generosity.

“When justice is done, it is a joy to the righteous but terror to evildoers” (21:15). “Whoever sows injustice will reap calamity” (22:8). “The evil do not understand justice” (28:5) “Some give freely, yet grow all the richer; others withhold what is due, and only suffer want.” (11:24). “The righteous know the rights of the poor; the wicked have no such understanding” (29:7).

George Floyd’s nine minute strangulation by four police officers - all on video - has challenged the notion that the U.S. provides proper justice and charity to its minorities. The video vividly shows how little terror exists within parts of our police, and at times how truly wicked they can be. It brutally displayed the lack of respect segments of our society have for other groups.

I acknowledge that the U.S., with 4% of the world’s population, is incapable of taking in all the millions of people around the world that would so welcome immigrating here. We are in the enviable position of having to secure our borders, not to keep people in but to keep others out.

At the same time, people seeking to immigrate here are often in difficult circumstances, badly in need of help. So, although we justifiably cannot fix the problems of all those asking our help, we can still be kind, generous and sensitive to their issues. Washington - both parties - has been negligent in developing a reasoned approach to this complex problem, compounding the suffering.

Still, this is little excuse for our sometimes insensitive and even callous behavior. An example is our policies to punish so-called sanctuary cities, where our citizens are trying to provide a modicum of social justice. Other examples include indefinite detention, separating families, and efforts to arrest illegal immigrants while engaging in otherwise legal behaviors.

What does Proverbs say regarding those who are not in power? “Open your mouth for the mute, for the rights of all who are destitute. Open your mouth, judge righteously, defend the rights of the poor and needy” (31:8-9). Those who are generous are blessed, for they share their bread with the poor” (22:9-11).

Temperance

Proverbs values temperance, the quality of balance and moderation, restraint, discipline and decorum. Compare these values with many so prevalent in today’s society: a bad tongue, arrogance, obesity, anger, pride and vainglory.

“Pride goes before destruction, and a haughty spirit before a fall. It is better to be of a lowly spirit with the poor than to divide the spoil with the proud” (16:18-19). “When pride comes, then comes disgrace, but with the humble is wisdom” (11:2). “Before destruction one's heart is haughty, but humility goes before honor” (18:12). “Like a city breached, without walls, is one who lacks self-control” (25:28). “Do not boast about tomorrow, for you do not know what a day may bring. Let another praise you, and not your own mouth—a stranger, and not your own lips” (27:1-2).

Ironic, isn’t it, that white evangelical protestants were primarily responsible for giving us a leader who has little value for temperance or justice, and not a lot of prudence. And this same group persists today, willing to lead an insurrection for a man who is the antithesis of Proverbs. Decorum, restraint, harmony, charity, judgement. These are words that he does not know.

I wonder how such church-going, religious Christians can reconcile their leader with a Bible that shouts otherwise.

Proverbs presents a picture of the proper human life that is far different than much of what we see today. It emphasizes wisdom versus folly, temperance versus excess and extremism, and justice versus inequality and bias.

But a world that dismisses wisdom is hardly much interested in what anyone said thousands of years ago. I would ask, though, that we consider for a moment that people are rarely as smart or independent as they think they are, and some quiet contemplation may present a better way forward than today’s shouting match.

And for those who don’t share my Judeo-Christian heritage, I suggest that you look into your own traditions. Wisdom literature and proverbs are widely found in probably all cultures. And I suspect their observations will be quite similar.

Mar 10, 2021

The Case for Coverdell Education Savings Plans

Much is written about 529 plans, the standard tax-advantaged savings plan for a college education. (They are legally known as “qualified tuition plans,” authorized by Section 529 of the Internal Revenue Code.) Their benefits are wonderful - nearly unlimited savings and tax advantages, flexibility and sometimes a state tax credit or deduction.

For those few with significant resources, it is the no-brainer choice for putting away tens of thousands of dollars into a tax-free college fund for your children's college education.

But for most parents, a Coverdell Education Savings Plan (ESA) not only works just fine, they generally provide more investment options and lower fees. Further, withdrawals can be used for qualified elementary and secondary education expenses as well as for college.

Coverdell accounts limit contributions to $2,000 a year per child for those with an adjusted gross income under $220,000 (joint). But the vast majority of households are under this income limit. Further, for the average family with about two children, saving $4,000 a year is realistically about their college savings limit.

Both 529 plans and Coverdell ESAs offer great benefits. They allow for tax free growth as long as the proceeds are used to pay for qualified education expenses. The plans remain your assets, not your child's, which means you are not committed to giving them this money.

And because the assets are yours, they have significantly less negative impact on financial aid. (Note that if funds are not used for education or other purposes the IRS approves of, the gains are eventually taxed with an additional penalty.)

529 plans are set up separately in each of the fifty states and their rules vary by state. In general, contribution limits are much higher than Coverdell’s, there are no income limits for contributors and have no age limits for beneficiaries.

Further, some states offer a state income tax deduction or credit for contributions to 529 plans but not for Coverdell plans. Again, these are great benefits for high income families trying to save a lot of money for their children's college expenses.

But at the more modest income and savings levels most of us live, a Coverdell ESA is often the better plan. Further, even if you have a Coverdell ESA, you can also have a 529 plan. Here's how the Coverdell works.

Coverdells are widely available at large brokerage firms, such as TD Ameritrade, E-Trade and Charles Schwab, with low minimum balances and no annual fees. You can generally invest in most of what they sell, which is just about everything, usually with no trading costs. Further, they offer broad very low-cost indexed funds, which are considered the best investment for most investors.

For example, you can open a Coverdell at Charles Schwab with no minimum and no maintenance fees. They charge no commissions on online equity trades with no minimums on trades. They also offer standard indexed funds with fees as little as .03%. Note that this is three hundredths of one percent, which is essentially zero. For a typical education savings account of $25,000, the fee comes to less than ten dollars a year.

Here’s some quick math on such a Coverdell. Over the past 100 years, the S&P 500 index (an index of the 500 largest U.S. stocks covering approximately 80% of the U.S. market capitalization), has returned a little over 8% a year after accounting for inflation.

Let’s assume you invest the maximum $2,000 a year into an S&P 500 indexed fund with near zero expenses. Assuming an average rate of return, your child will have about $80,000 in their Coverdell account in today’s dollars, which would cover most of the expense of a 4-year in-state college degree.

Let’s compare this with a 529 plan. My quick check found that most firms admit to fees up to 1% a year, an amount that could cut your total return significantly. 529 plans generally invest in a limited number of mutual funds, which tend to have higher turnover in their accounts, raising the total fees for these funds.

In life, simple and easy is not always preferable to complex and difficult. But in the financial world today, simple and easy usually means cheaper and better. In the past several decades, largely because of software and the internet, complex financial dealings have become simple products readily available at ultra-low costs to almost anyone.

But financial firms have struggled moving to a world where much of their former work has become largely valueless. Therefore, many work hard to obfuscate how little is needed to get a great return on your investments, instead encouraging products and services you probably have little need for.

This appears to be the case with 529 plans. Most aren’t set up, as are Coverdell’s, to have you simply invest your money in a near-zero fee indexed exchange traded fund, where the firm receives little income and you receive almost all of the gains from the underlying investments.

I did some research on 529 plans offered by Edward Jones. They quickly told me that “investing is personal” and immediately wanted my name so they can put me in touch with one of their financial advisors “to help.”

Unfortunately, these financial advisors are probably not going to help show you that your best option may be an ultra-low-cost Coverdell account where their firm will get less than $10 a year in fees. No surprise, Edward Jones doesn't even offer them. Instead, they quickly try to convince you of all the benefits of their 529 plans.

I tried to find fee information for their 529 plans. I never found any figures but I did find this buried away in their documentation: “529 plans will have fees and expenses, which will lower the rate of return. 529 plans generally carry sales charges (and) built-in operating expenses that affect the fund’s return (including) distribution and marketing fees (12b-1 fees), management fees, networking fees, annual account maintenance fees and transaction fees. Edward Jones receives a portion of the sales charge on 529 plans, and your financial advisor receives a percentage of that sales charge. Further, Edward Jones receives ongoing service fee payments, provided by the 12b-1 fees, and your financial advisor receives a portion of those ongoing service fees.”

Sales charges, distribution and management fees, networking fees, annual maintenance fees, transaction fees, sales charges, service fees. Only a fool would believe their fees are anything close to the $10 a year a typical education savings plan can cost you in a Coverdell ESA with a low-cost brokerage firm.

In comparison to these often complicated plans, a Coverdell ESA is just a simple brokerage account with IRS tax advantages. Otherwise, they function as another brokerage account, often including ultra-low costs.

Coverdell accounts have one other great feature, and that is they generally allow you to purchase almost any investment sold by the brokerage firm. In comparison, 529 plans are often limited to a subset of their mutual funds, often with higher fees than low-cost indexed exchange traded funds broadly offered by brokerage firms.

If you have a 401(k), this may sound familiar. 401(k)s are great retirement savings plans, but a little investigation shows that the same money in an IRA with a low-cost brokerage firm offers far more investment options at a lower cost. That is why whenever you are given the option, it is normally wise to transfer a 401(k) into an IRA, but that’s another topic.

529 plans are a great plan for many, especially for high-income taxpayers, primarily because they have few upper limits for income and contributions, and can offer a state deduction or credit. But when these are not considerations, which is true for most of us, a Coverdell account is a better option. They generally are easy to set up, have lower costs and more investment options, and provide more ways that the money can be used for a child’s education.

As always, 529 plans are different for each state and Coverdell accounts are different with every brokerage firm, so you are encouraged to do your own research before investing in anything.

Jan 11, 2021

Investing for 2021

We just closed out one of the most dramatic years for investing in a long time. The NASDAQ rose nearly 50% in the past year and has nearly doubled in the past two years; the S&P 500 rose 18% in 2020 and is up nearly 50% (including dividends) in the past two years. Tesla is up about nine times in a year, 25% so far in 2021, and bitcoin nearly five times in a year.

Ignoring for a moment the short and steep COVID drop this past March, 2020 continued what may be the biggest and best bull market ever. It started just weeks after Obama took office twelve years ago. From that low, the S&P 500 has risen over five times.

So where do we go now with this "everything rally" continuing to climb? I'll start with my general investing thoughts for any time.
 
The message that may be hardest to hear in a moment like this is that market timing is a bad plan. But it is still the plan that the human mind naturally goes to. A short history in human evolution shows that for most of our existence, the longest time frame normally needed for survival is one revolution of the earth around the sun. That's a good time period for growing crops, hunting animals and selecting a place to live.

And that's about the timeline that people unfortunately use for many aspects of modern life, specifically investing. Whereas following the crowd has been solid fishing advice for eons, it's not very good advice for investing. Buying now into any of 2020s hot investments is most likely a bad timing plan, but it is the prevailing thought.

Unlike fishing, market timing, normally turns into "buying high, selling low." The people that make money in hot markets are those who were in early and stayed in. The people who lose get in late and then leave after they've lost.

Market timing mostly devolves into chasing returns, sometime referred to as "managing for mediocrity." The adage "a fool and his money are soon parted" aptly applies.

So what can we do in a hot market like today? One of the first things is to evaluate how you are currently invested. What is the allocation you earlier established for your investments, if any? The simplest thing to do is to reallocate back to where you said you wanted to be. That's an easy way to "sell high."

Whether or not you have an allocation established, this is a good time to revisit that allocation. Consider how, regardless of recent returns, you should have your money allocated for the next several years. A good approach, regardless of age, is to keep any money you need in the next five years in cash or fixed income investments, and invest the rest in equities. Equities can safely be kept in a simple, low-cost S&P 500 index fund. They also can be partially allocated into foreign markets.

Another good review of your investments is to figure out the expenses incurred with each investment. Modern technology has made equities available to even the smallest investor at almost no cost. If you have funds charging over .5%, they should go.

Many "no-cost" investments have insidious hidden fees. Funds with high turnover are indirectly charging you for all their trading costs. 401K's are notorious for high fees. If you are able to transfer out, fees are normally considerably lower in an IRA with a low-cost brokerage firm than in a 401K. (But be careful with any transfer to ensure you are not taxed or penalized.)

If you are using a professional investment manager, make sure you understand where they make their money. They are professionals not just at managing your money, but also managing it to ensure they are paid well for their services.

As part of a review of your investments and allocation, also be sure you include all your investments, including you (and your spouse's) 401Ks, IRAs, savings accounts, savings bonds and brokerage accounts.

Do you understand everything you own? If not, either research the investment so you do understand what it is, or sell it and buy something you do understand. The two easiest investments for a well-managed portfolio of any size are an S&P 500 indexed fund and an indexed U.S. bond fund (commonly indexed to the Bloomberg Barclays Aggregate U.S. Bond Index). Both are widely available at almost no cost, either as mutual funds or exchange traded funds.

I've survived two horrendous market crashes, the 2000 dot-com crash and the financial crisis of 2007-2008. The first was a bubble in tech stocks where the NASDAQ lost 78% of its value. The second, part of the Great Recession, was broader, with the S&P 500 dropping 56%. I suspect we are in some form of equity bubble today.

But bubbles can expand for years longer than imaginable. And they can quickly crash unceremoniously, or they may drag out poor returns for years. That is, timing what will happen in the next few years is nearly impossible.

I've vowed that I will never again be caught surprised by a crash, but here we are again. For any of you who think it is time to get out, ask yourself what you will do if the market doubles in the next few years. I've known people who waited years after the last crash for still bigger drops. They lost out on most of this current bull market.

And if  you do get out, when will you get back in? After a 20% drop? 30%? 50%? There's no guarantee any of these benchmarks will ever be reached. In fact, the market may never again be lower than it is today.

So here's my 2021 advice. Take this opportunity to familiarize yourself with your current investments and to revisit your target allocation. Understand where your costs are and where you have essentially duplicate investments. Then quickly reallocate to your plan, possibly with some consolidation of equities. Don't buy anything you don't understand and don't buy anything you aren't comfortable owning for several years.

And stay there. If the market changes dramatically, up or down, deal with the changing environment by reallocating.

For years I have done this. When markets are raging, I will occasionally and painfully sell some equities. When markets head down, I just as painfully take the opportunity to buy into a market I do not like. Occasionally, only by accident do I get it right, selling at the highest point and buying at the lowest point. But in total, I'm buying low and selling high.

When surrounded by wonderful stories of stocks doubling and more, it can be tempting to want to buy some individual stocks. Normally, the returns don't justify the risk but it's not all bad thinking. If you do, be sure you understand what you are buying and why you believe it is at least a stable investment.

If a stock drops quickly, you may want to sell before you get in too deep. If it rises, be aware that stocks can rise for a long time, even after their financials don't support it. At its worst, you may learn something about yourself. A safe place to start is the list of S&P 500 Dividend Aristocrats, the bluest of blue-chip U.S. stocks.

At a larger level, your 2021 resolution may instead be to find yourself a financial advisor who can help with all your financial needs, such as insurance, debt, kids' education, emergency funds and retirement. But like your investments, be sure you understand their fees. A danger sign is when they offer their services, including personally directly all your accounts, for free. These are normally the highest cost services, mostly hidden from you. Your best start is with a Certified Financial Planner who works on a set fee.

Good luck. And let's hope that our investments are our biggest problem in 2021!