Paying For College

It is September, and that means Back to School!  Actually, more often than not now, August is Back to School month.  My son just started his Fall semester at his University.  If your child is still in K-12 and going to public school, then how to pay for it is not yet an issue.  If your child is in private K-12 or is in college, then you may have a big issue on your hands, which is, How do I Pay For This?


One of the most daunting thoughts that young parents have is, how much do I have to save every month so that my new child can go to college?  Sophisticated young parents can do a present value calculation to come up with that figure.  Less sophisticated parents can just do simple division, and that will get pretty close to the figure needed.  Private college costs upward of $65,000 per year.  State college costs less, but still a lot.  Community college – not so bad.  Recent statistics I have seen show that the college inflation rate has been leveling out for the last few years – at least some good news!  My CFP training would have practice problems such as the following:

  • Bill and Sue want to know how much per month they need to save for their 2-year-old daughter Ginny’s college education.  Bill and Sue met at a private Ivy League college which currently costs $64,000 per year, and they want Ginny to go to the same college.  College costs will increase 3% per year, and they think they can make 8% annualized on their investments toward college.  Assuming Ginny enrolls at the college at Age 18, how much will Bill and Sue have to save per month so that they have enough month saved to pay for all 4 years when Ginny enrolls as a Freshman?

The answer to the above practice problem is approximately $1,031 per month.  That’s a lot of money, and that’s only for 1 child.  Bill and Sue start saving when Ginny is only 2 years old.  Many, if not most, parents don’t get started that early.  However, there are some mitigating factors, such as:

  • Most students (or their parents) don’t pay the sticker price.  Colleges do offer need-based or even merit-based aid.  However, parents can’t plan for that when they get started with their savings plan.
  • Most parents don’t have 100% of the money saved by Day 1 when they drop their child off at their college dorm.
  • In-state tuition costs at state universities can be much less.  However, because of this, the top state universities are becoming harder and harder to get in to.  I live in California, which has 9 UC campuses.  Of those 9 UC’s, 6 have a median high school GPA of 4.0 for entering freshmen.  Other states have similar statistics.

Don’t Despair

A big concern for the financial planner is that the client will do that calculation and decide that it is so much money and conclude, why should I even bother to try to save?  That is the worst thing that can happen.  Any savings at all will help to pay for college, even if it is not 100% of the cost.  Instead of despair, think of the pride you will feel when you see your child walk across the stage at their Commencement Ceremony to receive their diploma.  That future sense of pride should be your motivation to save.


There are many loan programs available for college.  Most of these entail filling out a FAFSA form and working through the college to get your loan program set for you.  All of these require that the student and/or the parent pay back the lender after college.  Some of these student loans accrue interest even when the student is in college.  Contact me if you want to know more in-depth about the various loan programs.  Loans can’t be avoided in most cases, but perhaps they can be minimized with good planning.


Do anything you can to avoid loans and avoid putting yourself or your child/student into debt as a student.  There are other ways to “skin a cat”, some of which are non-traditional or indirect ways of paying for college.  Stick with this blog and I will discuss some alternative ways to pay for college in future blog posts.

PS:  Judging by all of the cat videos posted on social media, the US is more and more a nation of cat lovers.  It would follow that the expression “skin a cat” may be falling out of favor.  However, “skin a cat” as an expression may not have originated as you might logically conclude.  The expression may have originated from a boy’s gymnast-style maneuver he can perform while up in a tree.  Let’s see what the politically-correct warriors do with this as cat videos increase in number.

Bull Market vs. US Dollar

Today notwithstanding (the S&P 500 is off 0.50% and the NASDAQ 100 is off almost 1.50% today, Monday, September 25, as I write this), stocks have been in a bull market since President Trump’s election, and particularly since 1/1/17.  Through the close on Friday 9/22/17, the SPY (the S&P 500 ETF) was up almost 11.6% YTD in 2017, and the QQQ (the NASDAQ 100 ETF) is up a whopping 21.8%.  Those are great returns!


Media types have tried to explain the market’s rise various ways.  Proffered explanations have included the following:

  • Corporate profits are up due to better management at companies.
  • Bank profits are up due to a favorable interest rate environment.
  • GDP growth is expected to be enhanced by tax reform.
  • A proposed infrastructure spending bill will prime economic growth.
  • Stocks are benefiting from a weaker US Dollar.

In my opinion, all of these explanations have merit, but I believe the last one – the weakening US Dollar – has been the biggest source of fuel that has propelled the stock markets upward since 1/1/17.


Here is a daily chart of the SPY for the past year.  Pay particular attention to the period since 1/1/17:


Here is a daily chart for the NASDAQ 100:

As you can see, both of these have followed similar patterns:  Up.  Good for investors.  Investors who invest in index ETF’s have done well.  Value investors – those looking for companies that they believe are undervalued – may have done okay, or they may have not, depending on what they have invested in.

Now look at a daily chart of the US Dollar Index, which is the US Dollar vs. a basket of other major world currencies:

From Trump’s election through the end of 2016, the Dollar and the stock market both moved up.  Since January 1, however, the Dollar and the stock market has moved in opposite directions.  Stock Market – Up; Dollar – Down.  I believe the dollar’s devaluation has been the main reason for the rise in stocks.

Why? – Part 2

Why has the Dollar gone down?  Several reasons, in my opinion:

  • The dollar was previously overvalued, and the decline since 1/1/17 has been somewhat of a mean reversion.
  • Economies in other countries have improved, relative to the US economy.  Remember the Greece economic crisis?  Which was supposed to be followed by Portugal, Spain, and Italy going under and sinking the EU and the Euro?  And finally Brexit?  Well, none of the worst case scenarios have yet come to pass.  European economies have come out of their crisis, and the EU’s condition has certainly been upgraded from Situation Critical, if not fully healthy.
  • Medium and long-term interest rates in the US have declined relative to the rest of the world, even while the Federal Reserve has increased short-term rates.  The yield curve has flattened.
  • The Trump Administration wants a weaker dollar in order to boost US exports.  The weaker dollar means US goods are less expensive in other countries.  This may be good in the short-term but is a bad national policy in the long-term.

Why? – Part 3

Why has the Dollar’s devaluation caused an increase in stock prices?  It all boils down to this:  If the Dollar is not worth as much, then it takes more dollars to purchase something, including stocks.  It’s a form of inflation.

Currencies are like a supertanker – they don’t turn on a dime, and once they move in a certain direction, they tend to keep moving in that direction.  Therefore the Dollar’s recent decline may be part of a longer-term shift.  Below is a monthly chart of the US Dollar, on which you can see that the Dollar’s trends take a long time to play out:

Or, the Dollar’s decline may reverse and go back up again.  If I knew, I would bet the farm on it.  I don’t know, but I believe the decline in the Dollar explains why the stock markets have gone up this year.  I will continue to believe this until I see evidence that it isn’t true anymore.



Put Writing

Have you ever looked at a stock and thought, “I wish I could have bought it at (say 5%) lower than it is now!”?  Or, “I missed that breakout to the upside – let’s see if it gives back some of those gains and I can snatch it up then!”?  Or, have you ever thought that you could get paid for thinking this way?  There is – it is called Put Writing.  I do a lot of put writing.  Although I wouldn’t mind owning the underlying stock at the put strike price, my main objective is to generate income by collecting the put premiums that I sell.

Limit Orders

The traditional way of “fishing” to see if you can buy a stock at a cheaper price is through a limit order.  A limit order means that you will buy the stock at a certain price, but no higher.  The limit price is usually lower than the current price.  Limit orders are different than market orders, which mean that you will buy the stock right now at its market price, whatever that is.  Many traders use limit orders because they don’t want to get screwed in their trade executions.  Often, their limit price is at the market or maybe a few pennies below market – they don’t want to pay more than the current market for the stock.  The downside of limit orders is that the trade might not be executed – even if the limit order is a penny lower than the current price.  With a limit order, no money is changed hands until the stock is bought – there is no “down payment” necessary.

Get Paid to Fish

What if you went fishing and someone was there who paid you to put your hook and line in the water?  What if they said that, if you don’t catch anything, you can keep the money?  Sounds like a pretty good deal, right?  That’s what put writing is.  They pay you (in the form of put option premiums) to fish, and you keep the money if you don’t catch anything.  If you do catch a fish, you can keep it.  Cook it up, and have it for dinner.  Or, take it to the fish market and sell it, and maybe make some money there.  If you can keep it fresh!

My Strategy

I want to be the fisherman who doesn’t catch the fish but gets paid anyway.  I typically look at short-term time horizons – 1 week or so.  Identify a market that you think probably won’t go down for that period, and write a put at some strike price below the current market price.  Depending on the market’s or that stock’s volatility, the strike price could be near the current market price, or, if things are more volatile, the strike price could be farther away from the market price.  Find something that you think probably won’t go down:  That is a different mindset than Find something that you think probably will go up.  A more defensive mindset.  Collect your premium, and reassess a week from now.  I have a target in mind for my put writing:  I am targeting a 10% return.  That is, take however much capital you want to devote to this strategy, then multiply by 0.1, then divide that number by 52, and that’s how much option premium I like to target to collect on average each week.  Adjust week-to-week based on the level of volatility as well as your own personal comfort.


I just read an article that stated that a problem with writers is that the writers think that their readers know as much about a subject as the writer does.  My objective with this blog is to educate all readers about certain topics in ways that everyone can understand and that are fun to read.  Please contact me if you have questions about this or any of my blog posts.  For this post, I use my fishing analogy so that hopefully readers can relate to the concept of put writing.  If you don’t get it, please contact me, and I will try again.  If you do get it, and hopefully it is something you might want to try yourself, please contact me, and I can help!

Selling Options

In my previous post, I discussed the basics of Options and what it means if you buy a Put or a Call.  Today I want to discuss what it means to sell Puts and Calls – and I don’t mean sell them after you buy them.  I mean sell them without having bought them.  Is that normal?  Yes, it is done all the time.


In options parlance, selling an option without first owning it is called Writing.  You can write a put or a call, and you collect the option premium.  Why would you do this?  Because you hope that the option premium goes down after you sell it.  The best case:  The option expires worthless.  That means you keep 100% of the option premium.  That’s extra cash into your brokerage account.  It’s ordinary income on your Form 1040, but at least you get to keep part of it.  Many options do expire worthless.  Option writing is a very common strategy and it doesn’t have to be risky.

Call Writing

Call writing usually happens when you own the underlying stock.  Say you own 100 shares of Facebook, which is currently trading at $170 (Wow!).  You would be willing to sell your stock for $175 if the price gets there.  Instead of putting in a Limit Order to sell at $175, you write 1 Call contract with a strike price of $175, and you collect roughly $5/share +/- in options premium.  Then, if FB gets to $175, whoever owns that $175 call that you sold will exercise it and you will have to sell your 100 shares of FB at $175.  You still have pocketed the $5 of options premium.  The difference between the call writing and the limit order to sell:  You collect the options premium with the call writing, but the option could expire, whereas the limit order does not expire.  You can see that call writing is kind of a bearish strategy – if you want to keep both the options premium and the underlying stock, you don’t want the price of the stock to increase above the strike price.  Call writing is also considered to be a conservative way to generate income if you own the stocks on which you are writing calls.  That is a big “if” because, if you write calls on stocks that you don’t own, that is a very risky strategy called Naked Call Writing.  You can lose big money if you write a naked call and the stock goes up a lot.

Put Writing

Conversely, put writing is a bullish strategy.  When you write a put on a stock, you collect the put premium.  Usually, you write a put at a strike price that is below the current price of the stock  If the underlying stock price stays above the strike price for the term of the put, the put will expire worthless and you keep the premium.  If the stock goes below the strike price of the option, then you may have some trouble:  You have to purchase the stock at the strike price.  Let’s use my FB example above, with FB trading at $170.  Let’s say you write a put with a $165 strike price, and you collect the $5 +/- premium.  Then let’s say there is a market correction or there is bad news specific to FB, and FB falls to $150.  Guess what?  Because you wrote the $165 put, you now own 100 shares of FB that you bought at $165, and if FB is now trading at $150, you have a $15 loss.  That’s why put writing is a bullish strategy:  You want the underlying stock to either go up or go down just a little so that it stays above your strike price.  Unlike call writing, put writing is often done naked, or without owning the underlying stock, although you must have enough cash in your brokerage account to be able to purchase the stock if the market works against you and the underlying stock is “put” to you at the strike price.


Please let me know if you have any questions about this topic.  I am trying to write in language anyone can understand.  Options can be a difficult topic, but if you understand them, options can be a good way for you to hedge your positions, or in the case of writing, a good way to generate income for your portfolio.  Use professional help at first (i.e., contact me!), and thereafter you may feel confident flying solo with your options strategy.

Options De-Mystified

I trade a lot of options.  “Aren’t options risky?”  Yes, they can be, but they can also be bought or sold to hedge risk if you know what you are doing.  Don’t trade options by yourself if you have never done so before.  Remember when you learned to drive a car?  You needed a parent or (preferably) a professional instructor to teach you the basics.  You (hopefully) drove slowly at first, then sped up as you gained confidence.  You really learned to drive once you got your license and drove solo.  So it is with options trading.  Learn from a professional and go slow at first before striking out on your own.


Derivatives is another word that has become pejorative in some circles because derivatives trading has sunk a few investors and even financial institutions.  Options are a derivative security.  All that means is that options have no value in and of themselves; rather, their value “derives” from the company or the index they are associated with.  An option to buy 100 shares of Apple Inc. is not worth anything unless there is an Apple Inc. stock.


There are two basic types of options.  A Call option gives the owner the right (but not the obligation) to purchase the underlying security at a specific price within a specific time frame starting when the purchase is made until the maturity date of the option.  The specific price is called the Strike Price.  Options cost money, and the price of the option is called the Premium.  The size of the Premium (i.e., the cost of the option) is a function of several factors, including:

1)  The current price of the stock;
2)  The strike price of the option;
3)  Time until the option matures; and
4)  The volatility of the underlying stock.

There is an academic equation called the Black-Scholes Option Pricing Model that attempts to determine what the textbook price of an option is.  This will be the subject of a future blog post and not important for this post.

Options are sold in Contracts.  One Call option contract typically gives the owner to purchase 100 shares of the underlying stock. Depending on the size of the underlying company, call options are offered at various strike prices and various maturities, usually ranging from one week to one year out.  The bigger the company, the greater number of strike prices and the greater number of expiration dates.  Index ETF’s can have options as well as can individual stocks.  For instance, one of the most actively-traded ETF’s is the S&P 500 Index ETF (the SPY).  The SPY has strike prices for every $0.50 of the value of the SPY ETF (closing price today: $243.76), and maturity dates of every week for the next several months, and monthly maturities thereafter.  There are many options opportunities and investing strategies for options available in the marketplace.

Owning a Call option is a “bullish” investment strategy.  The Call owner thinks the underlying stock is going to go up.  The value of their Call will rise if the stock goes up.  A Call option is “in the money” if the option’s strike price is below the market price of the underlying stock.  “In the money” because the owner could use the option to buy the stock at the strike price, and then right after sell the stock they just bought in the market and collect the profit.


The opposite of a Call, a Put option gives the owner of the Put the right (but not the obligation) to sell the underlying security at a specific price within a specific time frame starting now until the maturity date of the Put option.  You can easily see how owning a Put is a “bearish” strategy – the value of the Put will increase if the underlying stock goes down.  You can also easily see that owning a Put can be a great hedge if you also own the underlying stock.  Most Puts are purchased to hedge long stock positions.  If you own 100 shares of a stock and the stock goes up but you are worried it might go down but you don’t want to sell the stock yet, then you buy a Put. That way, you lock in your profits at the Strike Price of the Put.  A Put option is “in the money” if the market price of the underlying stock is below the Strike price of the option.

But Not The Obligation

Most option owners don’t ever actually exercise their options to buy or sell their stocks, even if the options are in the money.  Instead, they will sell their option through the options marketplace (same place they bought it in the first place).  If they are in the money, they will realize their profits via the sale of the option rather than the underlying stock.  Who does ultimately exercise these options?  Somebody out there.  Probably not you.


This blog post is Basic Options 101, or even before that.  You will learn and get comfortable with Options as you gain more experience with them.  Don’t bet the farm initially.  Start slowly until you are comfortable driving solo.  Don’t ever speed – a speeding ticket can cost you a lot of money.  Work with a professional (another shameless plug for you to contact me!).

Nonvoting Stock

This blog post is in response to an article in the Wall Street Journal on September 6, 2017, by law professor Dorothy Shapiro Lund titled “The Case for Nonvoting Stock”.  Here is a link to a pdf of the article:


As background, almost all stock is democratic.  All shareholders vote.  If you don’t like the way a company is managed, then convince enough shareholders to vote No to corporate actions, and replace the Board of Directors and management.  Or, launch a takeover bid (usually at a higher stock price) and convince other shareholders to sell their stock to you.

It has only been in recent years that companies have gone public using nonvoting stock.  The most recent, prominent example is Snap, which I wrote about in my August 15 blog post.  I called it a bad deal and a teachable moment.

Professor Lund’s concern is that the various Indexes will bar companies with nonvoting stock.  She thinks barring such companies is a mistake.  She also says that having two classes of stock leaves corporate decisions to those who are informed, which she views as a positive.  I have two reactions to this article and Professor Lund’s opinion.

The Market

My first reaction is that having two classes of stock may be a good thing or it may not be a good thing.  The jury is out.  And who will be the jury to decide?  The market, of course.  If the nonvoting stock is a good thing, the market will warm up to it and investors will buy the nonvoting stock, thus driving its price up.  Other companies that are considering going public will notice, and they will consider issuing nonvoting stock as well.  It will become a more common and accepted practice.  If the nonvoting stock is not a good thing, investors will sell it (or not buy it in the first place) and other companies won’t use the same strategy. As to whether the Index arbiters (Standard & Poor’s and the like) should allow companies with nonvoting stock, that’s up to them, but the marketplace will determine if it will be a phenomenon going forward.


My second reaction is, what if our federal government operated like this?  Individuals don’t get a vote, and the country is better run by an enlightened elite?  This would be Progressive Nirvana!  Disdain for the common, uneducated voter.  Actually, our Republic system is sort-of organized like this.  Our elected Representatives and Senators vote on laws because they are fully-devoted to said endeavor and are more informed about what the laws say and do.  However, there is one big difference:  We citizens elect our Reps and Sens.  They work for us, and we can vote them out if we (collectively) don’t like what they are doing.

In the case of nonvoting stock, company management is not accountable to the shareholders.  They are only accountable to themselves, and perhaps the Board of Directors.  Management may not be solely motivated to enhance the value of shareholders; nor might they be motivated by the interests of other stakeholders such as the company employees.  Management would be self-interested and self-sustaining.  I guess a hostile bid could happen, but the hostile would have to convince an entrenched interest.


I am not picking on Professor Lund here.  Her article may have validity as it relates to the Indexes.   All I am saying is that, as they are currently structured, I am not a fan or a proponent of nonvoting stock deals such as Snap.  Snap stock is in the tank, and unless changes ensue, I think it will remain in the tank, and other companies will not follow the same playbook.


Flat Yield Curve

The equity markets sold off today.  All of the major indexes were off about 1%.  North Korea’s gift to the world this past weekend – a test of a new Hydrogen Bomb that registered 6.3 on the Richter scale – was one reason for the sell-off.  Another reason was the flattening of the Yield Curve.  Major US bank stocks sold off big-time as a result of the Yield Curve flattening.  Some banks stocks were down 2% or more.

Yield Curve

The Yield Curve is a graphic depiction of US Treasury yields plotted against their time to maturity.  (When I say graphic depiction, don’t think blood and gore – think about a graph).  Usually, the Yield Curve is upward-sloping.  This makes sense if you think about it.  You would want a long-term Treasury (say 10 years to maturity) to yield more than a short-term Treasury (say 3 months).  If you are investing in US Treasuries, you would want a higher yield for locking your money up for 10 years than for 3 months.


Prior to President Trump’s November 2016 election, the yield curve was relatively flat.  For instance, on January 4, 2016, the 3 Month T-Bill yielded 0.22%, and the 10 Year T-Note yielded 2.24%, which is a difference of 2.02%, or “202 basis points” in bond trader parlance.  (One basis point equals 0.01%).  Remember the headlines from this period?  Negative interest rates in Europe?  That means banks charge you for lending them money.  Bass-ackwards.

Trump’s election was said to be inflationary by the financial punditry at the time.  Greater economic growth meant greater inflation, it was thought by the Keynesian economists who govern the Federal Reserve Bank.  The Fed raised short-term interest rates. (To be fair, the Fed had started their interest rate hikes prior to Trump).  All US Treasury rates went up.  At their highest point, which was on 12/15/16, the 10 Year T-Note yielded 2.60%.  The 3-month T-Bill was at 0.51% on the same day, which equated to a spread of 209 basis points.  Similar spread to 1/4/16, but still relatively flat.

By the way:  A short-term Treasury (say less than a year) is called a T-Bill; a middle-term Treasury (say 2-10 years) is called a T-Note, and a longer-term Treasury is called a Bond.  More bond-trader parlance.  Just like in horse racing:  A male horse less than 5 years old is a colt, and a male horse 5 years old or older is called a, wait for it, a horse.

Today – Flat

At the close of trading today (9/5/17), the 10 Year closed at 2.07% and the 3-month T-Bill closed at 1.03%, a spread of only 104 basis points.  Considerably flatter than the 209 basis point difference on 12/15/16.  Why?  The Fed has bumped up short-term rates, while at the same time the “inflationary” Trump agenda has met roadblocks.  The Norks are exploding big bombs, which causes investors to seek the safety of longer-term US Treasuries, which causes their yields to go down.

The flattening of the Yield Curve is not a good sign.  It means Treasury investors think there may be more short-term danger than long-term danger.  What if things go truly bass-ackwards and the Yield Curve inverts?  Meaning short-term rates are higher than long-term rates?  Almost always, when the Yield Curve inverts, a general economic recession ensues.  Fortunately, it doesn’t happen too often.  Also, fortunately, flat is not the same as inverted.


A flat Yield Curve is bad for banks.  A lot of bank lending, including home mortgage lending, is priced off of the 10 Year T-Note.  Likewise, a lot of bank borrowing (i.e., customer deposits) is priced based on short-term Treasuries – including but not exclusively the 3-month T-Bill.  When the Yield Curve flattens, banks’ spreads ( the difference between lending and borrowing rates) also flatten, and banks don’t make as much money.  Investors in bank stocks come to realize this narrowing spread in aha moments like today, and they head for the hills en masse.


I think there is a safety premium now on the long end of the Treasury market.  I don’t think the North Korea threat is a great one because I don’t think North Korea has the ability to strike the US or any of its allies, nor does North Korea desire to strike the US.  They are just making a lot of noise.  I don’t think economic expansion = inflation.  Maybe investors in long-term Treasuries realize this as well.  Unless there is some sort of outside shock to the economic system, I think the Fed will continue to raise short term rates, which may put more pressure on the Yield Curve.  Banks will figure out a way to earn money.  The banking system is in much better shape than it was 10 years ago due to increased equity capital on their balance sheets.

I have previously written about taking a chill pill.  Same applies here.


It is very important to rebalance your portfolio periodically.  Whether it is a normal “taxable” account or an IRA or 401k, you or your investment manager should look at it every year or even every 6 months to see if your investment allocations are out of whack.  This takes discipline.  Maybe you look at it January 2 (first day of trading for the New Year), or every year on your birthday, but however you remember it, you should rebalance at least every year.


Most successful investors have a process for deciding on allocating a portfolio.  Basically, the process is this:
1) Decide on an allocation that is right for you based on your age, years to retirement, investment objectives, or the type of account that it is;
2) Allocate your portfolio according to how you have decided;  and
3) Check to see if your allocation remains in line, and if not, rebalance it by selling part of the over-allocated portion and buying the under-allocated portion.

A simple allocation objective might be something like 60% equities and 40% bonds.  A more sophisticated objective, especially if you are younger, might be 25% large cap stocks, 25% small cap stocks, 25% international stocks, and 25% bonds.  In a 401k or similar retirement account, your ability to allocate might be limited by the mutual funds that you have available to invest in.  In this case, you look at your set of funds available to invest in and you choose and allocate among them.  Typically you can still have some sort of stock/bond percentage allocation.

Many investors are good at Steps 1 and 2 above but they fall short at Step 3 because they forget or they are not disciplined enough to reallocate.


Once allocated, how does the allocation objective get out-of-balance?  Because of different investment results.  Say you have allocated 60% to stocks and 40% to bonds.  Then, over the ensuing year, stocks go up 10% and bonds go up 2%.  That would be a good performance!  However, at the end of that year, because stocks have gone up more than bonds, you are now over-allocated to stocks.  If you have continued to contribute to the account during the year, that is good, but typically your new contributions will be allocated in the same 60/40 manner.  Your new contributions will help your account balance go up, but it won’t change your out-of-balance problem.  At the end of that first year, you need to sell stocks and buy bonds so that, for the start of Year 2, you are now back in line with the 60/40 split.


Why is it important to reallocate?  Because of mean reversion, and because you are now one year older and closer to retirement.  Just because stocks may have outperformed this past year doesn’t mean they will outperform for the next year.  Stocks may very well hit a rough patch and bonds may outperform next year.  As you grow older, your allocation toward bonds and away from equities risk should increase.  If you are more exposed to stocks now than you were a year ago, you need to correct it.  Performances of various sectors tend to revert to their historical means over the long term.  You need to make sure your portfolio is properly positioned as sector performance changes from year to year.


None of this is rocket science.  It is all common sense.  The mathematics is easy – just multiply your account balance by your allocation percentage, and, voila! you have your allocation to your sector.  The biggest problem is remembering to do it, and having the discipline to reallocate your portfolio.  Consult with a skilled financial manager to determine the appropriate investment allocation for you, given your situation (shameless self-plug here!).  This conversation could involve a discussion with your advisor about the state of the various investment markets as well as a monitoring of your current life objectives.  Give yourself peace of mind.  Portfolio in balance = Life in balance.

Paying Off Your Mortgage

I recently read an article in the Wall Street Journal wherein it questioned the wisdom of paying off one’s mortgage.  The article posited that it is complicated, there are many factors involved, including the tax deductibility of mortgage interest, and concluded there is no right or wrong decision.

I Beg to Differ

Let’s go straight to the IMO section for this blog.  Maybe I would just state it a different way.  In my opinion, paying off one’s mortgage is never a wrong move.  If you have the cash and the means to pay off your mortgage, it provides peace of mind, and that is invaluable.  I look at paying off one’s mortgage the same as buying a mortgage-backed bond or pool of bonds.  If you buy a bond, you get the monthly coupon interest payments, which means more money in your pocket.  If you pay off your mortgage, you no longer have to make your mortgage payment, which means more money in your pocket. Either way, it is more money in your pocket.

Balance Sheet Effect

Paying off one’s mortgage does not enhance one’s balance sheet.  In accounting terms, all you are doing is using an asset (cash or investments) to pay off a liability (mortgage).  Your house doesn’t appreciate in value because you paid it off, and your net worth does not increase.  Instead, mortgage payoff enhances your cash flow, because you no longer have to make that monthly payment.

Return Differential

The only good reason not to pay off your mortgage if you have the means to do so is so that you can get better returns elsewhere with that money.  It has to be purely a financial decision.   In that sense, the mortgage holder is acting like a bank.  Banks make money when they borrow money at a low rate and then lend it out (or otherwise invest it) at a higher rate, and pocket the spread.  If your mortgage rate is 3% and you think you can make 8% on the money that you would use to pay off your mortgage, then it may make sense to keep paying your mortgage payment and go for the 8% return.  Keep in mind you are going farther out on the risk spectrum.  An 8% investment has a far different risk profile than does a 3% mortgage secured by your own house.  But you may have ways to mitigate the risk on the 8% investment.

Interest Deduction

The deductibility of mortgage interest is a nice perk, but if you are in a position to pay off your mortgage, you have to ask yourself, “Would I rather have a nice interest deduction, or would I rather own my house free and clear, and have the financial freedom that goes with that?”  Also, keep in mind:

  • In order to deduct your mortgage interest, you have to itemize, which means your itemized deductions must exceed your standard deduction.  The standard deduction may be going up, perhaps even doubling from current levels.
  • The deduction is limited to $1 million of debt, which may be decreased with future legislation.

Pay Off Other Debt

Should you increase your mortgage balance?  Should you refinance and take cash out to pay off other, higher-cost debt such as credit card or student loans?  This is a more difficult question to answer.  From a straight interest rate standpoint, there is no question that mortgage debt is cheaper than student loan, or certainly credit card debt.  But now you will be paying for the next 30 years rather than for a shorter term, and you put your ability to pay your mortgage and thereby stay in your home at greater risk.  On balance, if you have enough home equity, I would recommend replacing student or credit card debt with mortgage debt.  But don’t go above 80% loan to value (loan balance divided by home value).