Category Archives: Personal Finance

When Mayday Brought Capitalism to the Masses

Posted on May 1, 2014 | 3 comments

Capitalism

may 1, 1975

Today is May Day (May 1) 2014.  A search of this holiday that has taken on many meanings will most likely lead to two stories other than the most recent one that brought capitalism to the masses 39 years ago on May 1, 1975.

Story one is May Day’s ancient origin as a pagan festival also known as Beltane, held to celebrate the return of spring in the northern hemisphere, complete with the familiar May Pole, celebrated in many cultures to this day.

More recently, in 19th century America, union and anarchist protests for the 8 hour workday, culminated in violence at a May 1886 union rally outside the McCormack plant at Haymarket Square in Chicago, followed by the trial and executions of several accused. This event led to May Day’s celebration, mostly outside America, as International Workers Day.  In many industrialized countries May 1st is their Labor Day.  Socialists, anarchists and unions especially identify with this version of May Day.

Less familiar but celebrated in financial and investment circles, is the event of May 1, 1975.  This Mayday (most common spelling) was an SEC order  that deregulated fixed commissions on stock purchases that had endured for almost 183 years.  Rather than being driven by small investors, pressure to deregulate had been building through the 1950s and 1960s as large institutions and pension funds began realizing equities held over long periods of time produced superior results to other investments.  They were getting no breaks on larger volume purchases through traditional channels, but were discovering loopholes, and were big enough to bring political pressure for change.  An excellent May 1, 2010 article at ThinkAdvisor.com tells the story.

Following Mayday 1975, large traders could negotiate hefty discounts.  Discount retail brokerages sprung up to serve ordinary investors, but changes came slowly at first.  I can remember into the early 1980s, selling 135 shares of a low cost stock through a discount firm.  The transaction was handled as two separate trades, one for the 100 share “round lot” trade and another for the 35 share “odd lot” trade, along with separate $35 commissions for each.  Clearly liberation for the small investor had not yet fully arrived, except by sticking to a growing number of no load mutual funds that allowed direct purchase from the fund company without a commission, but Mayday 1975 had set the stage for what was to come.

A year later in 1976 Vanguard introduced the first low cost passively traded index mutual fund based on the S&P 500 index of large capitalized American stocks, intended for the individual investor.  This allowed “buying the market” and avoiding the expenses of trading in usually unsuccessful (because of the cost) attempts to outperform it.  Anyone could now guarantee capturing the generous returns equities have been shown to make available when held over long periods of time, less very low management expenses.  Success led to more index funds covering other segments of the market being made available.

Today any number of shares can be bought or sold for one low commission under $10 through a variety of online trading companies, without ever talking to a human.  This was made possible as online trading took off in the late 1990s and intense competition and efficiencies and availability of the internet came to benefit the consumer as never before.

Diversification across any number of asset classes is today easily achieved through very low expense ratio exchange traded index funds, avoiding the risk associated with individual stocks or expenses of trading.  Participation in the fruits of capitalism has never been cheaper or more accessible for virtually anyone.

Those who complain of big profits of large corporations only need to step up, themselves becoming owners, at very low expense, to join in the process of voluntary shared ownership that is capitalism, making the fruits of its success finally available to both them and the masses.  That truly is something to celebrate.  Happy Mayday (1975 version) to all!

Note: This article shared to WatchdogWire-Pennsylvania

 

 

 

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Posted in Business, History, Personal Finance, PersonalFinance/Investing

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Is Paying the Obamacare Tax a Better Choice for the Young and Healthy?

Posted on September 29, 2013 | 2 comments

Urgent Update and Correction:

Just as with this article at Business Insider, I missed the fact that enrollment in the exchanges is limited to open enrollment periods.

This does change the risk dynamics of paying the tax rather than buying the insurance.  Any confusion caused by this oversight is regretted.  Even still, those with either few assets to lose or those with sufficient assets to carry them to the next enrollment period, may still want to take the risks as presented in the original post.  The availability of sensible catastrophic true high deductible “real” insurance that Obamacare prohibits and has not been offered in the states would be the answer to this dilemma.

Original Post (with slight unrelated edits):

The following discussion is in no way intended as specific advice as everyone’s situation is different and unique to them, but only as a guide to uninsured young and healthy individuals to understand their choice in whether to buy health insurance on an Obamacare exchange to avoid paying the tax or paying the tax to relieve them of the obligation to purchase the insurance.  The only mandate for the uninsured is to make this choice, not to do one or the other.

The other purpose here is to counter biased government efforts that will insist the only choice is which insurance exchange plan to buy and how to sign up for it, ignoring the possible benefit of paying the tax instead.  This government effort is substantial, as here in Pennsylvania alone, over $6 million of taxpayer money is being directed to one critical thing Obamacare success is dependent on, enrolling as many young and healthy people as possible.  According to Enroll America-Pennsylvania, on July 10, 2013 “health centers in Pennsylvania were awarded a total of $4,196,333 to provide outreach and enrollment assistance.”  They also indicate that an additional $2,071,458 is coming soon to organizations that will act as “Navigators” who will likely never discuss the non-insurance option that is also important for the young and healthy to understand in making their choice.

Young people need to know a few facts of Obamacare at the outset.  Because the law limits charging the old and less healthy more than three times what the young and healthy pay, this shifts more burden to the young.  Offsetting this are premium subsidies to make the insurance choices seem affordable, but as the young advance their careers and their earnings these subsidies fade.  Another important consideration is that shortsighted bureaucrats designed Obamacare to allow no exclusion for previously existing conditions, giving the opportunity to purchase insurance after the onset of a serious illness, even from a hospital bed. Update: Still true, but only if during a subsequent open enrollment period.

The pay-the-tax choice may be useful for young and healthy people who have the discipline to put aside the difference (compared to paying exchange premiums) for their basic normal medical needs, and especially if they then find one of a growing number of physicians offering much lower prices by casting off third party payment for a cash practice.  It must be understood that this choice is not without the risk of an occurrence of a sudden and severe medical condition causing total incapacitation.  This extremely rare event could prevent them from signing up for insurance on an exchange until they are sufficiently recovered to do so.  Update: So long as it is within or until the next open enrollment period.

Putting the sudden-and-severe risk in perspective though is important.  Everyday young healthy people take on huge amounts of student loan debt, with no guarantee of acquiring a job sufficient to easily pay it back, even as student loan debt obligations saddle the borrower for life because  they are not dischargeable in bankruptcy.  Medical debts, on the other hand, can be eliminated through bankruptcy should the highly unlikely occur.  This is where an option to pay the tax and buy a very low cost non-Obamacare compliant policy that pays nothing up to perhaps a $10,000 or even $15,000 deductible, then covers everything above that, would be so useful, but no such thing exists.  Such a plan would be good enough to prevent bankruptcy in most cases and leave substantially less obligation than many young people have willingly taken on with student loans.

It is thus important for young healthy people to see the big picture, understand all their options, then act in their best interest, in reaction to the rules presented to them by the Affordable Care Act.  This discussion has been meant as a guide in starting the navigation of that process.  Additionally, there is a wonderful new resource blog, The Self -Pay Patient, that unfolds a myriad of already available but little known alternatives to insurance, and I highly suggest a visit for anyone serious about learning the many other options available to them, since no government navigator will ever mention any of it.

Note: This post was shared to WatchdogWire

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Posted in Healthcare/Insurance, Personal Finance

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State Pension Reform Should Look to the Federal Thrift Savings Plan Model

Posted on May 30, 2013 | 9 comments

tsp2

Many states are currently facing unfunded liabilities to their defined benefit pension programs.  Pennsylvania, in particular is over $40 billion short of its obligations, alone about 1.5 times its entire yearly budget.  Borrowing a concept from the private sector, and favored by Governor Corbett, is a plan to move all new state employees into a defined contribution 401k type program.  While the move to defined contribution makes very good sense, it is important to recognize the problems with this approach and avoid them, doing the best we can for our state employees.

Defined contribution is subject to failure on two fronts.  First are high costs that limit investment returns.  Many plans offer overly expensive investment choices that, because of the high costs, often in the short term and pervasively in the long term, do not match the returns of simple passively managed low cost index funds.  Then to make matters worse, responsibility to select the right mix of investment choices is dumped into the laps of ordinary workers (and some very smart workers also) who know little to nothing about the principles of sound investing, thus becoming their own worst enemy by allowing their emotions to make decisions that put them on a path to very poor results.  The good news is that it doesn’t have to be this way and there is a superior model that all can strive to achieve.

The most surprising thing about this defined-contribution-done-right example is the source, that being the Federal Government, of all places!  It’s indeed uncanny and hard to admit the Federal Government doing anything better than the private sector but the Thrift Savings Plan does just that.  The TSP is administered by the Federal Retirement Thrift Investment Board, an independent agency of the Federal Government established in 1986.  It now has over 4.5 million participants with $374billion in assets at the end of 2012.

What sets the TSP apart from most plans offered in the private sector is its strict adherence to low cost and simplicity.  It currently offers only five investment choices plus target date collections of the five funds designed to produce the highest returns for the least amount of risk appropriate.  The target date funds were added in August 2005 to address unprepared employees choosing poor fund mixes and then trading them on emotion to their detriment.  The target date mixes are determined by scientific methods looking at past volatility and returns of the individual asset classes as well as how they tend to move relative to each other, combined with the participant’s individual time horizon.

While private sector 401k plans are dominated by actively managed funds that purport to be run by managers clever enough to beat the market, all TSP funds are passively managed index funds that won’t beat the market but guarantee capturing the generous returns the markets make available over time less very small expenses to do so.  The dirty little secret is that attempts to beat the market most often end up trailing the market, mainly due to the expenses incurred in the pursuit.  Study after study confirms this as presented in the writings of such investment heavyweights as John Bogle, founder of Pennsylvania based Vanguard Funds, who in a 2006 interview for Frontline noted:

“So our legislators and our federal employees get these great benefits through as close to a perfect retirement plan as you can have ……  We don’t do that for our regular citizenry.”

Attempts to require private sector 401k plans to offer even one low cost index fund has been a struggle.  The TSP, using only index funds, offers coverage of five distinct asset classes for an expense drain to the worker that is the lowest anywhere.  Expenses compound in the negative as returns compound in the positive and can alone result in huge differences in account balances at retirement time.  The actual numbers will seem untrue but they’re not.  While many private 401k plans impose reported expenses to the investor in excess of 1%, or 100 basis points, the TSP reported 2012 expenses across all funds of an amazing 0.027% or 2.7 basis points!  The actively traded fund manager hoping to beat the market must make up this difference just to break even because the expense of trying is passed through.  In addition to reported expenses are those that are hidden but real nonetheless.  A good article at Nerd Wallet lists 28 known potential hidden fees and shows by example how differences in expenses will drastically affect outcomes at retirement.

So when states look at defined contribution there are important choices within that choice that deserve attention.  One approach that should certainly be considered and has yet to be attempted to my knowledge would be for a state to petition the Federal Government for voluntary participation and inclusion of its  employees within the Thrift Savings Plan.  So long as the TSP could accommodate unique matching and vesting criteria for each state’s employees, this expansion of the TSP into state governments should only benefit both states and their workers.  In addition, a smoothly running structure that has been developed over time would save the expense to reinvent it.

In March I proposed this concept to one of the best investment advisors I know on his Saturday radio show, Financial Freedom, on WHP 580 in Harrisburg.  Mr Tim Decker, host of the show, was fully supportive of the idea and the various legislative committees now considering pension reform would do well to seek input from Mr Decker.  Our radio conversation can be heard here.  Jump to 14:00.

Just yesterday morning on CNBC’s Squawk Box, Larry Fink, CEO of BlackRock, the largest investment management firm in the world, appeared with Congressman Paul Ryan.  Both were singing the praises of the Federal Thrift Savings Plan, presenting it as the best model for individual retirement accounts.  Significantly this is exactly what George W Bush suggested as the basis for voluntary private Social Security accounts.  Will Pennsylvania and other states make the TSP their model for state employee pension reform?

Note: This story was shared to WatchdogWire-Pennsylvania

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Posted in PA Politics, Pennsylvania, Personal Finance, Politics

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