The $1.9 trillion covid19 relief law (American Rescue Plan Act) includes large increases in health insurance subsidies in addition to the $1,400 per person payments to individuals. The law increases subsidies for 2 years.
Under the new law, nobody will have to pay more than 8.5% of their income on health insurance. The government will also pick up 100% of COBRA premiums through September. COBRA is health insurance for people who’ve lost their jobs.
“Probably about three-quarters of uninsured people in the U.S. who are citizens are going to be eligible for some sort of financial help,” said Cynthia Cox, a vice president at the Kaiser Family Foundation.
I wrote before about the fact that under the old law, based on how the subsidy worked you could lose over $5,000 in health care subsidy payments by earning just enough to no longer be eligible for the subsidy. This new law eliminates that issue (for 2 years) as health insurance costs are now subsidized so that they cost no more than 8.5% of income (instead of having a hard cut off where subsidies go to $0).
For people most people that pay for their health care themselves (instead of their employer paying) this is likely a much larger benefit than the cash payment of $1,400.
The Kaiser Family Foundation calculator lets you get a quick idea of what your approximate subsidy benefit. A 55 year old earning $55,000 would be entitled to a subsidy of $4,700 about 50% of their health insurance costs (based on the USA average). For a 50 year old the subsidy would be $2,900 or 38%. For a 60 year old the subsidy would be $6,800 or 59%. For a couple of 35 year olds and 2 children the subsidy would be $12,100 per year or 72%.
For a 35 year old couple earning $85,000 with 2 children the subsidy would be $9,600 per year or 57%. And for a 55 year old earning $85,000 the the subsidy would be $2,200 per year or 23%.
Only the family of 4 would have been eligible for any subsidies under the old law (or will be eligible after this new law expires in 2 years). And the single 55 year old earning more than $80,000 is not eligible for the $1,400 payment but would receive $2,200 as a health care subsidy.
This is a huge personal finance benefit that has not been widely discussed but will have a huge impact on people’s financial health for the next 2 years.
Early last year when studying my portfolio I decided my two biggest positions (Apple and Google – those ready the blog won’t be surprised due to my 10 stocks for 10 years posts) continued to warrant the large portion of the portfolio they held. I also decided that I would systemically sell say 1% of Apple and 2% of Alphabet a year (the Apple dividend was also paying about 1% – actually it was more then but is much less now).
That was just a long term plan that helped me think about the long term portfolio management. But that, like all investment decision, was subject to revision. As both continued to soar I decided it made sense to sell more but maintain a similar plan, just maybe selling 2% and 4% a year (or something).
Basically I still like them as investments. I still feel both companies long term prospects are excellent. I do also feel both are pretty richly valued. They certainly do not seem to be the huge bargains they were 15 years ago. At first my main reasons for slowly selling some was mainly that the portions of the portfolio were growing a bit too high. At this time, that has become even more true. But also the prices are also getting very rich. Selling at these prices seems pretty attractive.
At these prices if I sold more now and then prices decline I can have already cashed in my planned yearly sales (based on my original plan) and therefore could hold off for several years (instead of selling at those reduced prices). And if the prices continue to go up, well I still own a lot of them and so I will profit handsomely in that case.
I have a new 2nd largest holding – Sea Limited ($SE). It is a Singapore based company that I am very high on for the long term. I bought a fair amount, all in that last year. But nowhere near enough to be my second largest holding. However my originally purchases were in the $50s and $60 and today, less than a year since my first purchase, it is at $217. It is a richly valued stock but I believe the potential is still very promising I have no plans on selling any of this anytime soon. It is volatile, it is down 5% today.
It is useful to think about the long term and even to make tentative plans. But, as an investor, adjust those plans as conditions change. I see such plans as helpful thoughts and reminders, not plans to follow automatically.
I do continue to find that the existing prices in the market make finding great investments difficult. I am normally very “over-invested” in the stock market. I have been trying to reduce how over-invested I am. I am doing that a bit less successfully than I would like. But I am raising some cash. I do remain over-invested, which is fine for me, but I also am a bit more over-invested than I think is warranted. I will continue to try to raise some cash. It is a bit difficult for me as I am naturally drawn to make investments when I see available cash to invest.
Related: Retirement Portfolio Allocation for 2020 – Long Term Changes in Underlying Stock Market Valuation
In some ways investing recently has been pretty easy, anything you have bought (almost) goes up – and usually goes up a lot. But when looking for bargains to invest in, it just keeps getting more and more difficult in my opinion.
Apple’s most recent earnings report was spectacular. However, unlike when similar things happened 8 years ago, when such great news allowed you to buy a great company cheaply even after great news now Apple went from an already pricy level and added 10% to that the next day. And it has continued to go up. Apple is by far my largest holding (given how expensive it is, a fairly crazy 25%). So I do still like the company long term, but I have been selling a bit the last year (though not nearly enough to keep it from dominating my portfolio more and more).
Years ago it was easy for me to buy Apple and be very confident I would do very well over the next 5 to 10 years. Now I am more hopeful than confident. And one reason why I continue to hold so much is I don’t see other great buys.
In the last 6 months I did make a big buy of Sea Limited ($SE) a company based in Singapore with large gaming, internet commerce and emoney interests. They are especially focused on South East Asia. I bought a lot of this quickly and that has proved wise (at least so far). I made it my 3rd largest holding (Alphabet is 2nd) very quickly and I am up over 100% already. It is speculative. But given my options it seemed like a great opportunity. I would have been much slower to increase the size of this position if I had other options I really liked.
Overall I am going much more into cash as a safe haven than I have before. Normally I am extremely overweight stocks. Even today I am still overweight stocks compared to the conventional wisdom (and the only bonds I hold are Series I USA Savings Bonds (which are actually a good investment option, though you are limited to buying $10,000 per year).
While the markets are giving investors great returns finding good buys is becoming more and more difficult (at least for me). For example, my 10 Stocks for 10 Years (2018 version) has done very well. But several of those stocks are much less a bargain today that they were. Apple is up from $225 to $450. Danaher from $103 to $206. Amazon from $2,000 to $3,150. Tencent from $43 to $68. Alibaba from $175 to $256. The only stock down is Abbvie, from $97 to $95 (though with dividends, it yields 5% now, it is up a small bit). Abbive seems like the rare bargain to me today. While there are short term risks Tencent and Alibaba also seem to be priced reasonably and offer good long term potential.
I think, my post, Long Term Changes in Underlying Stock Market Valuation, provides insight into the challenges of consistently finding the type of values today than was possible in previous decades.
Related: Investment Options Are Much Less Comforting Than Normal These Days (2013) – Retirement Portfolio Allocation for 2020 – Tucows: Building 3 Businesses With Strong Positive Cash Flow
The markets continue to provide difficult options to investors. In the typical market conditions of the last 50 years I think a sensible portfolio allocation was not that challenging to pick. I would choose a bit more in stocks than bonds than the commonly accepted strategy. And I would choose to put a bit more overseas and in real estate.
But if that wasn’t done and even something like 60% stocks and 40% bonds were chosen it would seem reasonable (or 60% stocks 25% bonds and 15% money market – I really prefer a substantial cushion in cash in retirement). Retirement planning is fairly complex and many adjustments are wise for an individual’s particular situation (so keep in mind this post is meant to discuss general conditions today and not suggest what is right for any specific person).
I wrote about Retirement Savings Allocation for 2010: 5% real estate, 35% global stocks, 5% money market, 55% USA stocks. This was when I was young and accumulating my retirement portfolio.
Today, investment conditions make investing in retirement more difficult than normal. With interest rates so low bonds provide little yield and have increased risk (due to how much long term bond prices would fall if interest rates rise, given how low interest rates are today). And with stocks so highly valued the likelihood of poor long term returns at these levels seems higher than normal.
So the 2 options for the simplest version of portfolio allocation are less attractive than usual, provide lower income than usual and have great risk of decline than usual. That isn’t a good situation.
View of Glacier National Park (a nice place to go in retirement, or before retirement) by John Hunter
I do think looking for dividend stocks to provide some current yield in this situation makes sense. And in so doing substitute them for a portion of the bond portfolio. This strategy isn’t without risk, but given the current markets I think it makes sense.
I have always thought including real estate as part of a portfolio was wise. It makes even more sense today. In the past Real Estate Investment Trusts (REITs) were very underrepresented in the S&P 500 index, in 2016 and 2017 quite a few REITs were added. This is useful to provide some investing in REITs for those who rely on the S&P 500 index funds for their stock investments. Still I would include REIT investments above and beyond their portion of the S&P 500 index. REITs also provide higher yields than most stocks and bonds today so they help provide current income.
While I am worried about the high valuations of stocks today I don’t see much option but to stay heavily invested in stocks. I generally am very overweight stocks in my portfolio allocation. I do think it makes sense to reduce how overweight in stocks my portfolio is (and how overweight I think is sensible in general).
Amazon announced they are opening major new offices in Arlington, Virginia and New York City. Each site will hold 25,000 new Amazon employees at an average salary above $150,000. Getting to that level with take many years, next year under 1,000 employees will be at each site.
I lived in Arlington for many years and own rental property there. The Amazon decision is likely to catalyze a much more rapid ascent of the technology sector in the DC area. The DC area has a strong foundation of internet technology to build upon, though many people are not aware of this. The Amazon move will likely help shift the perception of the DC area as government driven and the growth of internet technology activity in the area is likely to grow rapidly.
The 25,000 jobs (even with a greater than average salary of $150,000) isn’t the main impact of the announcement. The big news is the likelihood of Amazon’s highly visible efforts catalyzing more tech businesses (especially 5-7 years down the road when some of the Amazon people start creating their own startups). It isn’t that Amazon is moving into a barren tech landscape, there is already a strong base from which to launch a long term tech boost to the DC area economy.
The direct impact of Amazon’s employees renting and buying in and around Arlington is not going to be very strong for a couple years. Amazon plans to add 500 people to Arlington in 2019; 1,000 more in 2020 and 2,000 more in 2021. But investors already can plan for a strong future demand from Amazon and all the activity that Amazon’s growing presence will contribute to.
I am actually selling my house in Arlington (in this photo), with a very nice yard (explanation below).
The increase in housing prices in 2019 and 2020 will be primarily investor driven. In 2020, 2021 and going forward the impact of Amazon employees directly and all the extra activity spurred on will start to have an impact. Unlike the stock market where such a predicable strong investment future would drive prices up say 30-50% immediately, in real estate it is much more likely for the gains to be spread out over the long term.
If prices in housing increase in Arlington it is more likely they would increase say 10% in the first year and then an extra 3% (above what the increase would have been without Amazon’s move) each of the next 10 years. From a long term investors perspective this provides a great possibility for buying now (even after the news) and not having to pay a huge premium.
Rental housing prices are not likely to go up much immediately. And they will take longer to show up in the market, they will be much more closely tied to new job additions (from Amazon and others). So investors have to pay a higher price today (say 5-10% higher) and in the first 1 or 2 years probably see no higher rents than they would have otherwise. And even after 2021 those rents are likely to go up more slowly than prices of real estate.
Abuse of the credit system by 3rd party collection agencies (and credit reporting agencies) in the USA has been a long term problem.
An attempt to partially address some of the abuses was a change in the required reporting practices that impacted collections accounts specifically, known as the National Consumer Assistance Plan (NCAP), which rolled into effect during the second half of 2017. The plan has many components, including: (1) a requirement for more frequent, detailed, and accurate reporting of collections accounts, including reflecting when those accounts have been paid; (2) a prohibition against reporting debts that did not arise from an agreement to pay, or from, medical collections less than 180 days old; (3) the removal of collections accounts that did not arise from a contract or agreement to pay; and (4) permission to report any account only when there is sufficient information to link the account with an individual’s credit files (requiring a name, address, and some other personally identifying information such as a Social Security number or date of birth).
All in all, the changes in credit reporting prompted by the National Consumer Assistance Plan have resulted in an $11 billion reduction in the collections accounts balances being reported on credit reports. A total of 8 million people had collections accounts completely removed from their credit report. However, collections accounts do indeed align with other negative events and the cleanup of collections accounts had the largest impact on the borrowers with the lowest scores.
These borrowers will certainly benefit in the long run from the cleanup of their credit reports, since higher scores are associated with better access to credit, to the job market, and even to the rental housing market. But the immediate impact of the removal of collections will be muted for most of those affected (other items are also impacting their current credit score).
In the longer-term there may be a rebound in collections account reporting because creditors will likely begin collecting the newly required personally identifying information as they adjust to this reporting change.
This was a small good step in protecting consumers from the bad behavior of credit reporting companies and their customers. But much more must be done to protect us from having our financial lives negatively impacted by bad practices of the credit reporting companies.
Related: Cleaning Up Collections – Avoiding the Vicious Cycle of Credit Problems – Truly Free Credit Report – USA Household Debt Jumps to Record $13.15 Trillion
The Federal Reserve Bank of New York’s Center for Microeconomic Data today issued its Quarterly Report on Household Debt and Credit, which reported that total household debt increased by $193 billion (1.5%) to $13.15 trillion in the fourth quarter of 2017. This report marks the fifth consecutive year of positive annual household debt growth. There were increases in mortgage, student, auto, and credit card debt (increasing by 1.6%, 1.5%, 0.7% and 3.2% respectively) and another modest decline in home equity line of credit (HELOC) balances (decreasing by 0.9%).
Outstanding consumer debt balances by type: $8.88 trillion (mortgage), $1.38 trillion (student loans), $1.22 trillion (auto), $834 billion (credit card), $444 (HELOC).
Mortgages are the largest form of household debt and their increase of $139 billion was the most substantial increase seen in several quarters. Unlike overall debt balances, which last year surpassed their previous peak reached in the third quarter of 2008, mortgage balances remain 4.4% below it. The New York Fed issued an accompanying blog post to examine the regional differences in mortgage debt growth since the previous peak.
As of December 31, 4.7% of outstanding debt was in some stage of delinquency. As the chart shows mortgage and credit card debt delinquency rates have decreased sharply since 2010. Student loan debt delinquency rates have increased substantially during the same period (and delinquency rates for student loans are likely to understate effective delinquency rates because about half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high). You can understand why many see student debt as a huge economic problem the economy is facing in the coming years.
Of the $619 billion of debt that is delinquent, $406 billion is seriously delinquent (at least 90 days late or “severely derogatory”). The flow into 90+ days delinquency for credit card balances has been increasing notably from the last year and the flow into 90+ days delinquency for auto loan balances has been slowly increasing since 2012.
The latest massive breach of USA citizen’s private information by poorly run companies once again shows how we are voting for the wrong type of people. We need to start electing people that fix problems instead of watching things burn.
It is not impossible to improve if you elect people that care about making things better. If you elect people that are driven mainly by doing favors for those giving them cash you get the system we have now.
I believe in designing systems that use markets to create the best solutions to desired outcomes (this is the basic idea of real capitalism – instead of the crony capitalism we have been infected with). Europe has much more respect for citizen’s privacy that the USA does. Europe has much more effect laws on protecting citizen’s privacy. For decades the 2 political parties in the USA have taken large cash donations (and more, future cushy jobs…) to allow the current system to punish citizen’s as their private information is abused and they are expected to spend their time and resources to fix the problems created by the identity theft the lack of decent systems in the USA to stop identity theft. And the design by the 2 parties to put the cost of dealing with it on voters and the benefits (of selling private consumer information and using poor security practices to create problems that voters have to clean up) to those giving the parties cash.
We need to stop voting for such corrupt parties and such poor representatives of our interests (though they are very good representatives of those paying them cash).
So what is a simple starting point for taking the burden of dealing with the easy identity theft our political parties and companies that don’t care about the costs of their sloppy practices on society are?
- Force those approving false credit to pay. Anytime you have to fix credit given falsely in your name they must pay you. Say, $1,000 minimum.
- Force those providing false information about you to pay. If credit bureaus report false information about you that you must correct it is $50 if it is fixed within 7 days of a simple internet form being completed. If it takes 30 days the cost is $150. If they require you to provide additional information, additional costs accrue. They must provide your the original documentation on the loans.
- Give consumer automatic and free control over the use of their private information.
Obviously, credit freezes, and managing that status must be free. - Any organization that collects private financial information must have liability insurance. That insurance will automatically pay per security breach. For name + SSN ($150) + Date of birth ($20) + cell phone number ($20) + current address ($100) + credit card number ($50) + email address ($10) + mother’s maiden name ($25), etc. If you do not collect SSN, credit card number, cell phone number or current address this will not apply. I haven’t given it any thought, but there should be some level of private information that pushes you into the category of the organization that must have liability coverage (what that is can be worked out).
- The funds for those security breaches are paid to the Consumer Financial Protection Bureau and used to
- create better security practices for private information
- fund enforcement of those better security practices
- fund law enforcement investigations and criminal prosecution of those abusing private financial information
This idea needs to be expanded beyond my 1 hour of thinking about it, but it is sad that in 1 hour I can think of much more effective ideas than our political parties have put in place in 20 years.
The reliance on SSN as a identifier for people is something that shouldn’t have been allowed. It is one of many things that should be fixed and it should be fixed quickly.
The organization created here needs to focus on privacy of data. They need to encourage the use of encryption. They need to be given a seat at the table to counter those seeking to promote hacking (both leaving insecure software in place and creating insecurity in the software ecosystem to exploit and be exploited by criminals and other states) to benefit state sponsored spying. That debate will result in tradeoffs. Sometimes they will decide to allow our private information to be put at risk for other benefits. But they need to accept the responsibility of doing so. It would likely be sensible to charge the departments leaving open security holes and creating security holes anytime it becomes obvious that they are responsible for the harm to us. Otherwise they pretend there are not costs to the very bad security practices that our government has been encouraging (even as crazy as it sounds building backdoors into software – which is a security disaster obviously).
Other than the extremely sad state of affairs in health care in the USA (with the Republicans focusing on making it much worse) the biggest threat to our personal finances is likely the lack of security in our financial system (though to be fair there are other plausible candidates – very high debt level…).
Related: Protecting Your Privacy and Security (2015) – Making Credit Cards More Secure and Useful (2014) – Governments Shouldn’t Prevent Citizens from Having Secure Software Solutions USA Congress Further Aids Those Giving Them Cash Risks Economic Calamity Again – Security, Verification of Change – 8 Million New Potential Victims of Identity Theft (2008)
Health Savings Accounts (HSA) allow you to save money in order to pay health expenses in a tax free account. They are similar to an IRA but are for health expenses.
Eligibility is limited to those with high deductible health care plans.
HSA funds can be saved over the years. Flexible spending accounts are somewhat similar but that money can not be rolled from one year to the next. The idea with HSA is you can save money in good years so you have money to pay health care expenses in years when you have them.
Health Savings Accounts are meant to cover deductibles, co-pays, uncovered health needs etc. that those stuck with the current USA health care system have to deal with. HSA are best used by people who are healthy, as the idea is to save up money during healthy years so there is a cushion of funds to pay health expenses later.
Health Savings Accounts are not a substitute for health care insurance. The health care system in the USA is so exorbitantly expensive only the very richest could save enough even for relatively minor health needs that are free to all citizens in most rich countries. HSA are legally available to you without health insurance but doing without health insurance in the USA is a disastrous personal financial action in the USA.
And the system is even worse in having ludicrously high charges that all insurance companies get huge discounts on. But if you try to use the USA health system without insurance the unconscionable charges that no insurance company pays will be billed to you. Even if your insurance company paid nothing, the reduction in fees just due to providers not charging the massive uninsured premium charges is critical.
Your HSA contribution is taken out of your paycheck on a pre-tax basis and grows tax deferred.
Withdrawals from an HSA for qualified medical expenses are free from federal income tax. At age 65, you can withdraw money from the HSA to use in retirement for expenses not related to health care. You will owe taxes at this time, but no penalty.
Related: 2015 Health Care Price Report, Costs in the USA and Elsewhere – Health Insurance Considerations for Digital Nomads – Personal Finance Basics: Health Insurance
I have written before about one of the most important changes I believe is needed in thinking about investing over the last few decades: Historical Stock Returns.
My belief is that there has been a fundamental change in the valuation of stocks. Long term data contains a problem in that we have generally realized that stocks are more valuable than realized 100 years ago. That means a higher based PE ratio is reasonable and it distorts at what level stocks should be seen as very overpriced.
It also depresses expected long term returns, see my original post for details.
Jeremy Grantham: The Rules Have Changed for Value Investors
Since 2000, it’s become much more complicated. The rules have shifted. We used to say that this time is never different. I think what has happened from 2000 until today is a challenge to that. Since 1998, price-earnings ratios have averaged 60 percent higher than the prior 50 years, and profit margins have averaged 20 to 30 percent higher. That’s a powerful double whammy.
Diehard Ben Grahamites underestimated what earnings and stock prices would do. That began to be a drag after 1998.
I believe he is right. I believe in the value of paying attention to historical valuation and realizing markets often go to extremes. However, if you don’t account for a fundamental shift in valuation you see the market as overvalued too often.
So why have prices risen so high without a hint of euphoria — at least until very recently — or a perfect economy? My answer is that the discount rate structure has dropped by two percentage points. The yield on stocks is down by that amount and bonds too. The market has adjusted, reflecting low rates, low inflation and high profit margins.
Again I agree. Our political parties have aided big business in undermining market through monopolistic market control and that has been consistent (and increasing) for decades now. It makes stocks more valuable. They have moats due to their monopolistic position. And they extract economic rents from their customers (granted they put a large amount of those ill gotten gains into executives pockets but even so they gains are large enough to increase the value of the stocks).
On top of these strong forces we have the incredible interest rate conditions of the last decade. This is the one that is most worrisome for stock values in my opinion. It servers to boost stock prices (due to the poor returns for interest bearing investments). And I worry at some point this will change.
There is also likely at some point to be a political return to the value of capitalism and allowing free markets to benefit society. But for now we have strong entrenched political parties in the USA that have shown they will undermine market forces and provide monopolistic pricing power to large companies that provide cash to politicians and parties in order to have those parties undermine the capitalist market system.
I believe the stock market in the USA today may well be overvalued. I don’t think it is quite as simple as some of the measures (CAPE – cyclical adjusted PE ratio or market value to USA GDP) make it out to be though. As I have said for several years, I believe we are currently living through one of the more challenging investment climates (for long term investors seeking to minimize long term risk and make decent returns over the long term). I still think it is best just to stick with long term portfolio diversification strategies (though I would boost cash holdings and reduce bonds). And since I am normally light on bonds and high on stocks, for someone like me reducing stock holding for cash is also reasonable I believe (but even doing this I am more in stocks than most portfolio allocations would suggest).
Related: Monopolies and Oligopolies do not a Free Market Make – Misuse of Statistics, Mania in Financial Markets – Interview with Investing Blogger John Hunter