Financial Update – Dec 2020

Goodbye 2020. You will not be missed.

 

Another month, another update. A few random comments.

Good Reads/Listens/Watches

• The Finance Buff on the “CARES Act 2.0” (link).
  • $300 (single) / $600 (married) non-itemized charitable deduction for 2021. Does not affect 2020. Cash only — no appreciated securities. 
• Mankiw’s NYT article on the double-edged sword of low interest rates (link).
  • Some of the implications of low interest rates are already clear. For example, a balanced portfolio of half stocks and half bonds has historically earned a return of 8.2 percent, or about 5 percent after inflation. My guess is that a more plausible projection is an inflation-adjusted return of about 3 percent.
    
    That means that institutions like universities that use the return on their endowments to fund their activities will need to tighten their belts. It also means that individuals will need to rethink retirement saving. According to my calculations, to support any given level of spending for a 20-year retirement, a person’s nest egg entering retirement needs to be 19 percent larger. For much the same reason, public and private pension plans are probably more underfunded than current estimates suggest.
    
    There are, however, also upsides to the decline in interest rates. Young families looking to buy homes, for example, benefit from the lower cost of mortgage financing.
    …..
    In the end, low interest rates are a double-edged sword. We don’t yet know which edge will be sharper.
• Hidden Brain on Stoicism (link).
  • I’ve long thought that the key to happiness is not the acquisition of more material stuff, but rather to be more content with what you already have. I thought this episode did a great job explaining ancient techniques to accomplish this.
• Blog reader Kacybw, a pension actuary, shared a 400 page pdf in a recent comment which is the conclusion of an extensive audit of the financially precarious Pennsylvania public pension system (link).
  • I haven’t gotten through all 400 pages yet, but the section entitled “Active and Indexing” on page 121 of the pdf is pure gold. I don’t know that I’ve read a more succinct and well-articulated repudiation of active management. In just over a dozen pages, the commission convincingly concludes that pursuing active management strategies is a fool’s errand.
• Queen Maud Land (link).
  • Free with a 7-day trial of Outside TV (remember to cancel).
  • This 27 minute film featuring a group of six climbers, including Alex Honnold, Conrad Anker, and Jimmy Chin as they climb several of Antarctica’s treacherous peaks in inhospitable conditions. It reminded me of Meru, though not quite as good.
  • Also included with the free trial:
    • Stumped (link) was hilarious and great.
    • Sufferfest (link) and Sufferfest 2 (link). 
    • Safety Third (link).
• Beau Miles builds an office out of junk (link).
• Planet Money on the economics of Christmas trees (link).
• Interesting NBER paper on the distributional consequences to the potential policy of $50k/student forgiveness in student loans (link).
  • We study the distributional consequences of student debt forgiveness in present value terms, accounting for differences in repayment behavior across the earnings distribution. Full or partial forgiveness is regressive because high earners took larger loans, but also because, for low earners, balances greatly overstate present values. Consequently, forgiveness would benefit the top decile as much as the bottom three deciles combined. Blacks and Hispanics would also benefit substantially less than balances suggest. Enrolling households who would benefit from income-driven repayment is the least expensive and most progressive policy we consider.

Life

• I went disc golfing with 4″ of fresh snow. It was a blast, though finding buried discs was pretty challenging. Through 3 rounds of golf (times 7 people), we collectively only lost one disc which submerged in icy creek. I consider it a success.
• As part of my retirement plan (consultant) committee work at my employer, I benchmarked several university retirement plans in the midwest. It’s amazing how much heterogeneity there is in plan quality across universities.
  • Here’s my benchmarking spreadsheet (link).
    • The sheet is not terribly informative as is, but clicking on the respective hyperlinks in the right column demonstrates the large amount of variation (in fund offerings/costs) across plans.
  • After spending a couple of hours researching university retirement plans on the internet, I found some exemplary plan menus. The three universities below completely remove actively managed funds from the menu. Given the convincing evidence on the superiority of passive investing strategies, I’m flabbergasted that the below passive-only menus are the exception, not the rule. With any luck, my university will transition to such a system soon, saving university employees 8-figures per year in fees.
    • Stanford (link).
    • Harvard (link).
    • Carnegie Mellon (link).
    • Not shown above are recordkeeping fees. The current best-practice is separating these fees from the underlying expense ratios of the funds (the opposite of what my current employer does). For example, Harvard’s TIAA relationship charges a fixed $28/person/year fee to cover these administrative expenses (link).
• We (responsibly) visited my parents near Park City, a popular vacation destination. After running an errand, we were stopped at a stoplight. As I spoke with my family, I noticed a $3k Nikon DSLR camera sitting on the hood of the SUV idling at the red light next to us. I managed to blurt out the words “Camera! Camera Left! Camera! Camera Left” to my father who was driving. He had no idea what I was talking about for a few seconds. Finally, it registered in his brain. He honked his horn at the red light but was unable to get the attention of the driver. The light turned green, and the SUV proceeded to make a left turn (the camera was on the passenger side of the hood). We were sure the camera would fall off in the intersection, but it didn’t. During the ensuing straight section of road, we continued to try to notify the driver of the SUV with no success. Defeated, we turned onto the interstate knowing we had tried our best. Surprisingly, the car ended up changing lanes and following us onto the freeway! On the onramp, my father put on his hazards to try to flag the guy down. The guy blew past us a quarter mile before finally realizing their mistake and pulling over and safely retrieving the camera. He gave us a defeated/embarrassed/half-hearted wave as thanks. That sure was an exhilarating/frustrating couple of minutes.

A balmy 20 something degrees.

Real men play disc golf in the snow.

My buddy going inverted to successfully retrieve a disc that he’d corralled to the edge of the creek using a long stick. I was desperately trying to hold on to his feet/legs, but my grip gave out. Luckily I didn’t drop him headfirst into the water.

 

A casual letter from our middle school principal stating that the school may have accidentally poisoned students with killer ice cream. FC2’s friend was among the affected. Despite complaining that the ice cream tasted “off”, she devoured the cone. Luckily, she survived unscathed. As if there weren’t already sufficient things to worry about in 2020, now killer ice cream is added to the list.

Some sledding fun. I froze my butt off because I underdressed and had to wait in the car. Photo credit Mrs FP.

Bike commuting in 0°F temps with wind chill. Comfortable thanks to bar mitts on bikes are of my best investments ever. Thanks to Kim (the artist formerly known as the Frugal Engineer) and Ken (from interior Alaska who often makes fun of me for complaining about the relatively mild midwest winters) for inspiration last winter. Biking in winter is pretty enjoyable. Our city does a good job of plowing the bike trails, oftentimes plowing the trails before the main roads are plowed.



A decade ago, a buddy of mine had a prankster at work photoshop the above picture of him and leave it at his desk. My (cat-less) buddy resurrected the photoshopped photo and sent it out as his family’s Christmas card this year. I thought it was pretty funny.

Playing Superhot on the kids’ new Oculus Quest 2 VR system. It’s pretty fun. Beatsaber is also a hit. I almost dove on my dog during Superhot. My daughter almost punched a hole in the TV. At least neither of us did this (link). I guess there is an entire subreddit dedicated to videos like this one called “VR to ER” (https://www.reddit.com/r/VRtoER/). Here are a few more gems (link0, link1, link2, link3, link4, link5, link6). Prior to playing the Quest I would have mocked these people. Now I sympathize with them; it’s pretty darn immersive.

Utah is not ugly. 11,752 ft Timpanogos is one of the most majestic mountains I’ve ever seen, particularly from Sundance. 

 

This Month’s Finances

• The good:
  • Still employed…
• The bad/abnormal:
  • $236 for annual unfrugal dog checkup & shots.
    • Our neighborhood goes all out on Christmas lights every year, and my wife and I joke that we usually put forth a “C” effort on this front, which is improved from our “D-” effort in earlier years. After Mrs FP dutifully put up our lights in our front yard this year, unfrugal dog ate a strand of lights the first two days they were out. After the second consecutive day of light mauling, I suggested that we ought to preemptively remove the rest of the lights before they were all destroyed. Mrs FP disagreed, insisting that unfrugal dog would learn. 10 days into the ordeal, we lost 8 strands of lights. The only only two that remain are too high for her to reach (one on the upper part of a tree and the other on the upper part of our garage door) — both are disconnected from electricity.
      • Such general depreciation expenditures are not well captured as “dog expenses” in my spreadsheet because I tend to track actual cash flows, not accumulated depreciation on existing assets. I seldom remember to allocate the replacement purchases to unfrugal dog. Consequently, the stated cost of dog ownership is surely understated by at least $250/year in general destructive tendencies.

 

Made Me Laugh

• Slickdeals thread discussing a $590 men’s t-shirt with gaping, intentional holes over the chest (link). There are some hilarious comments in the thread.
• The above reminded me of this legendary Amazon review that went viral of the infamous 571B Banana Slicer:
  • What can I say about the 571B Banana Slicer that hasn’t already been said about the wheel, penicillin, or the iPhone…. this is one of the greatest inventions of all time. My husband and I would argue constantly over who had to cut the day’s banana slices. It’s one of those chores NO ONE wants to do! You know, the old “I spent the entire day rearing OUR children, maybe YOU can pitch in a little and cut these bananas?” and of course, “You think I have the energy to slave over your damn bananas? I worked a 12 hour shift just to come home to THIS?!” These are the things that can destroy an entire relationship. It got to the point where our children could sense the tension. The minute I heard our 6-year-old girl in her bedroom, re-enacting our daily banana fight with her Barbie dolls, I knew we had to make a change. That’s when I found the 571B Banana Slicer. Our marriage has never been healthier, AND we’ve even incorporated it into our lovemaking. THANKS 571B BANANA SLICER!
• If you find the above as comical as I do, perhaps you would enjoy wasting a few more minutes of your life reading some more here.

 

Footnotes:

1. Fidelity unambiguously has the best HSA on the market. $0 admin fees + $0 expense ratio funds.
2. I lazily approximate home value as my historical purchase price.
3. I have a 15Y mortgage which results in much larger principal payments than a 30Y mortgage. Since principal payments are simply transfers from one pocket (assets) to another (debt reduction), I treat such cash flows as savings.
4. ~$0 cell phones described here.
5. All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, medicine, toys, etc).
6. Nobody knows the perfect asset allocation. Just pick one and run with it. Use a target date retirement fund as a benchmark if you want some guidance (link). If you prefer to DIY (as I do), then a three-fund portfolio is great (link).
7. My low portfolio expense ratio is the primary reason why I don’t hold target-date funds, which have expense ratios anywhere from 0.16% to 1%. I can achieve a much lower expense ratio on my own due to Admiral shares, etc. And it’s not hard. Plus, a DIY portfolio allows one to tax-loss-harvest more easily.
8. ETF’s are slightly more annoying to hold relative to index funds. With ETF’s, you must deal with bid-ask spreads as well as the inability to buy partial shares. With a simple index fund, you don’t have to deal with either of these issues. Bogleheads discussion here (link).
9. I continue to own VTSAX rather than FZROX and in my taxable brokerage account because it is more tax efficient due to lower capital gains distributions. Bogleheads discussion here (link).
10. The one blight in my expense ratio analysis is my 529 plan. The underlying Vanguard fund is almost free to hold (0.02%), but the high administrative fees bring the total cost of holding the fund to 0.29%. I abhor fees and would likely avoid 529 plans if I didn’t get to deduct up to $10k of contributions per year on my state return, saving myself $700/year in state income taxes.
11. CA’s 529 plan has the lowest expense ratio US equity index fund of any in the US (link). I’d have 100% of my money here if not for the state tax deduction I receive in my own state.
12. I own one share of Berkshire Hathaway (B Class) for the sole purpose of getting 4 free tickets/year to Berkshire’s annual meeting.
13. I bought 100 shares MoviePass for $0.0127/share to be able to tell my students that I held a stock that went to zero. So far, the stock price stubbornly remains above zero.

Disclaimer: This site is for entertainment purposes only, as disclosed here: https://frugalprofessor.com/disclaimers/