Looks like the UK has voted to leave the European Union. Financial markets are reacting horribly to the news, with Europe down 8%, UK down 9%. So what’s a Brexit? Why are financial markets reacting so bad? Is it time to panic? Why don’t we knock these questions down one at a time, then my favorite security for riding out the situation.
Explain Like I’m 5, Brexit
So Britain has never quite been of one mind about the European Union. For one they’ve always refused to participate in the Euro. The sticking point seems to be anti-immigration sentiment. EU rules mean that there is free movement of people throughout the EU. So, anyone from anywhere in Europe could go and live in the European Union. In the United States, we’ve had this for centuries. If you’re born in a poor state like Mississippi you can move into a wealthy state like California, no one worries about it. To get an idea of the sentiment in Britain, maybe it’d be easier to imagine if NAFTA had a legislature rather than just being a trade agreement.
Further imagine that this legislature had decided that there should be free movement of people as well as goods in North America, so that someone from central america could move to Oregon with no visa or other documentation. Basically all current illegal immigration in the US would be legal, and there would probably be more. While I think that would be a good thing, you can understand how there would be a great deal of opposition and calls to leave NAFTA.
When thought of that way it’s actually quite amazing that the vote to leave the European Union was as close as it was, 52% in favor of leaving versus 48% in favor of staying in the EU. This brings us to our next question…
Why markets are crashing
While free trade and immigration remain unpopular with populists the fact of the matter is that they are great for the economy. Iregui in 2005 <link> found that the cost of immigration restrictions to world GDP as somewhere between $11.5 trillion and $158 trillion (in 1990 dollars). Yes, that’s a huge range, but no study I’m aware of has found that free immigration wouldn’t be a massive economic benefit to the world. The reason for this is obvious. If Einstein is born, but gets stuck in Kenya the whole world suffers. Further, as we move more toward a knowledge economy the variance of productivity from any one person has increased substantially. When all anyone does is farm, it really doesn’t matter where you’re born, you still produce about the same amount. But when some people are capable of building companies worth hundreds of billions of dollars, the world misses out on vast wealth by locking them out of, say Silicon Valley, for example.
So, in my view, the markets see future restrictions in freedom of movement as bad. Further, I think there is some expectation of a trade war between the UK and the EU. Trade wars are bad for the same reason immigration restrictions are bad, and can have similar costs.
Even so normally, the market doesn’t react this badly to crappy news, I can’t think of the last time I’ve seen the UK’s stock market (the FTSE) sell off 9%! This is probably because the market wasn’t expecting the British to vote to leave the European Union. Normally, votes like this the market has time to build in the drop over months as it becomes more obvious that the British will stay, or leave, or whatever. This time the market got it wrong, betting markets said that the UK would probably stay in the European Union. It seems that bad weather in pro-stay areas might have been a significant factor. The market, unfortunately, doesn’t have a preternatural ability to predict the weather, and so it got blindsided. The result is that all of the downside of the UK leaving the EU has to get baked into stock prices at once.
If you have money in the European stock exchanges, as I do, you might be wondering, is it time to panic? In a word, no. In financial markets panic is never the correct solution. Any time you let your emotions get control of your decision making in your finances you might as well set money on fire. I keep a shoebox of dollar bills to burn so that I can achieve catharsis without making more expensive decisions.
In fact, I suggest that you instead just assume that you can’t sell any financial instrument you buy. At some point I’m going to have to go back through my brokerage statements and figure out if I’d be better off if I never sold any of the stocks that I ended up selling. I’m pretty sure I’d be better off.
My favorite panic security
When the rest of the world panics, I want to sell them safety. I should note at the beginning here, selling safety is very risky! I have 0.2% of my investable assets in it. Today I will probably lose half of what I have invested in it. If that doesn’t sound like the stock for you, don’t touch it with a ten foot pole.
The “stock” is the exchange traded fund XIV. The VIX is the so-called fear index. It measures volatility in the market. As of this writing the VIX is up about 36%. Some people like to use it as a hedge by buying funds that track the VIX, so that when volatility goes up and they lose money in other parts of their portfolio the VIX going up makes up for it. In order to get this protection owners of these funds expect to lose money on average over time. Essentially, by buying XIV we accept the risk that owners of VIX that are trying to get rid of, in exchange for the expectation of making money over time. That risk means that XIV crashes by 75% occasionally. On average you outperform the S&P 500.
Maybe you’ve seen a nice graph of risk versus returns. Cash is low risk low return, short term bonds are more risk and more return, long term bonds give more risk and more returns, then all the way on the riskiest end you have something like small-cap stocks giving the most risk and the most return. XIV is the dire half-dragon version of this. You’d have to be crazy to think you could successfully trade this, I simply keep it under 0.5% of my portfolio by selling when it’s above that, and I buy more when it gets below 0.15% of my portfolio.
What’s the conclusion here? I think Britain made a mistake, but there is a silver lining. Stocks are on sale, and I’m loading up.
When done for more than a month travel can cost approximately nothing when compared to your current living situation. It can also be horrendously expensive. If you would like to blow all of your money travelling, here are some ideas.
Eat Out: Every Meal
When you’re travelling its just too difficult to go to the grocery store and make some simple meals. Certainly making sure that the place you stay at has a kitchen would be way too expensive. Make sure to eat out for every meal. If you just order all of the food that looks good you can hit $10 for breakfast, $20 for lunch and dinner each. That works out to $70 per day, which is about what a company might give you in per-diem, so you’re on the right track. If you must save money, eat fast food.
Purchase Alcohol at the Restaurant
While you’re eating out it would be gauche to bring your own bottle of wine or beer bought at a grocery store. Make sure to purchase wine at the restaurant, and always purchase the second cheapest wine. After all you don’t want to be a cheapskate, but why waste money, right? This could add another $5 per day.
Pay Attention to the Total Hotel Bill, Not the Nightly Rate
You need to see a lot of stuff on your vacation. You don’t want to be tied down to the same place. Make sure to book a lot of different hotels so that you can see everything you want to. If you book rooms as you go you’ll get more comfortable with paying higher, and higher prices for rooms. After all, how often do you go on vacation? You don’t to wind up having to share a bathroom, do you? So this might start out costing you $80 per night and creep up to $100 or $120 by the end of your trip. While you might be able to save a couple dollars booking for a week or a month in the same place, then it isn’t really travelling is it?
Rent a Car for the Entire Period
Look, you can’t really see another place without driving it right? Better rent a car for the whole period. Make sure you only rent rooms at hotels where you can actually park that car. From what I’ve seen, this can run anywhere from $300 to $800 per month. Not so bad! Don’t forget to add the cost of gas though. In the US gas is pretty cheap. Outside the US it can be 2-3x as expensive. If you’re using the car as the primary method of travel, better count on buying more gas than you do at home. For me, I’d assume $300 per month in gas.
Bring Plenty of US Cash to get changed if abroad
It can be a hassle to use an american credit card while abroad, but everyone takes cash. Bring a bunch of dollars, but make sure to keep them safe. Wouldn’t want your wad of hundreds to get stolen! Then you can go to one of many cash exchanges. Their markup is 10%, but what are you gonna do, nothing beats the convenience of cash for foreign travel.
Food & Drink: $80 per day, $2400 per month per person
Hotel: $100 per night average, $3000 per month
Transport: $700 per month.
Total bill for a one month trip: $6100, but wait, we still need to tack on the 10% markup. So that’s $6710! I don’t know if that’s what you spend while you’re at home, but I sure don’t. If you’re going to be on vacation for an extended period, try to keep it more reasonable. How to keep it more reasonable? Invert what we just talked about.
- Create a home base. Get the minimum nightly rate for the entire period by booking one place for an extended period. Make sure it includes a kitchen. Nice places can be had in many countries for less than $20 per night if booked for at least a month.
- Keep the eating out to a minimum. This applies when you’re on travel just as much as when you’re at home. You can cut your eating costs to a tenth of restaurant dining by simply cooking yourself. Buy whole foods, fruits and vegetables. By all means, enjoy the cuisine of the country you’re visiting, but if you’re anything like me, the 10th meal in a row of the same food will probably have you crawling up a wall in any case.
- Figure out alternative transport. Most metropolitan areas around the world have inexpensive alternatives to cars. $30-40 per day of gas and car rental costs buys you a great deal of metro, bus, and train tickets. Don’t underestimate the possible cost savings here!
- Never get cash changed. There are so many ways of avoiding foreign transaction fees or the nutty markups charged by money exchanges. ATM’s can be better if you use a checking account which will reimburse your ATM fees. Use credit cards which charge no foreign transaction fees when possible.
Stick to these rules, and do your best to cut expenses you won’t need while abroad (phone bill, car insurance, maybe even rent), and you’ll be well on your way to the coveted net-zero (no additional cost) vacation.
Well, it seems to be time for another update regarding the presidential election. Unless you’ve been living under a rock you’ve probably found out that the two main parties have managed to choose their candidates for president. Hillary Clinton is running for the Democrats, and Donald Trump is the Republican nominee. The GOP seems to be of two minds about its candidate. Bill Kristol recently tweeted, “Official position of the leadership of the Republican Party: Trump is an inexcusable bigot, and Trump must be our next president.” While officially these are not yet the nominees, I have bad news for those of you holding out for other candidates. It isn’t going to happen.
As I’ve mentioned before, in my estimation the best way to tell which candidate is going to win an election is to check prediction markets. While these don’t tell you who will win, just who is likely to win, I find it to be a good starting point. Prediction markets like PredictIt give odds on specific events, usually political events. Long story short, we’re looking at the latest price at which a candidate was traded. That value in cents expresses the probability that a candidate will win the election. In this case a picture is probably worth a couple hundred words:
This leaves Hillary Clinton with a 2/3rds chance about winning the election and Donald Trump with a 1/3rd chance of winning the election. You’ll notice that the probabilities given here do not precisely add up to 100%. I’ve discussed this in more detail elsewhere. The chances of the candidates with small values as their latest trade is probably overestimated, though I think that it is telling that we are more likely to see a Johnson White House than a Romney.
Why is Clinton More Likely to Win?
Hillary Clinton is a moderate democrat, and while Donald Trumps political views are sometimes unclear, moderate doesn’t seem like an appropriate word for him. The economy of the country is currently doing well (unemployment is roughly at 5% and most economic indicators I’m aware of are good). This is generally helpful for the party of the sitting president. Of course if you looked at the 2008 election in June and had to guess what was going to happen you might have argued the same thing.
Demographics also help Clinton and Democrats in general. It’s hard to see what sort of coalition the Republicans will build to attempt to win the White House. Millennials overwhelmingly support Democrats over Republicans. Demographic segments that are growing generally support Democrats, and demographic segments that are shrinking support Republicans.
Who will I vote for?
I’m a libertarian and am therefore inclined to vote for Gary Johnson in the general election. In the past I have voted for Republicans and Democrats who I thought were libertarian leaning for their party. Senator Rand Paul would be an example of a libertarian leaning Republican and Representative Jared Polis would be an example of a libertarian leaning democrat.
Donald Trump is not a libertarian leaning republican. Though honestly I don’t know if Donald Trump has any core beliefs. I haven’t seen any substantive policy proposals from him, though I’d be prepared to be proven wrong. His behavior in the past regarding eminent domain suggests to me that he just doesn’t take property rights very seriously. His talk on free trade agreements indicates to me that he is pushing a protectionist or mercantilist view of trade. His most talked about policy proposal, that we build a wall between the US and Mexico indicates to me that he isn’t in favor of open borders. There is a libertarian wing of the republican party, but Donald Trump seems to want to trade us for a nationalistic blue collar base. He will not receive my support in November.
Hillary Clinton doesn’t seem to be a libertarian leaning democrat as much as she seems to be a moderate democrat. I might call her a republican leaning democrat before I called her libertarian leaning. She too has made comments about free trade that make me nervous. On the other hand, I’m not sure she actually believes them. Generally, I think candidates who claim to agree with me are lying about it, and secretly have other positions. I don’t generally trust republicans or democrats who claim to want to cut spending for example. In the case of Hillary, I’m not sure that she doesn’t agree with me and is simply lying to court her base. Unless Hillary Clinton makes some substantial changes to her arguments before November, and I ascertain that those changes are genuine, I will not be supporting her.
That leaves me with Gary Johnson. While he is a more moderate libertarian than other libertarian candidates for the nomination, he’s a candidate that I can live with. I’ve come to accept that most people in the country simply don’t agree with my view of what the federal government should be, and would prefer to have a larger state that provides more services and is more involved in conflicts around the world. I’m under no illusions that Gary Johnson will win the nomination. The election may turn out to be close, and Johnson may obtain a large enough percentage of the vote to swing the election (as Nader did in 2000). I believe that will indicate to the larger parties that there is a sizeable part of the electorate up-for-grabs and unsatisfied with the platforms of the major parties. I think that this will give libertarians a larger voice if the two major parties attempt to court them.
But that’s it. Who will win, probably Hillary Clinton. What will be the political landscape post-election? I have no idea.
Who are you planning on voting for? Are you satisfied with the choices?
Crowdfunding is a new trend that has emerged within the last decade and has been a huge part of the Millennial culture. Crowdfunding is defined as, “the practice of funding a project or venture by raising many small amounts of money from a large number of people.” According to Goldman Sachs, crowdfunding raised $34.4 billion dollars in 2015 and is only expected to raise more in the coming years.
There are four major forms of crowdfunding which differ drastically; however, they are all included in the general term “crowdfunding.” Let’s take a look at the differences between each form of crowdfunding including the different ways you can gain by participating in them.
The Most Known Type of Crowdfunding: Reward Crowdfunding
Initially, the crowdfunding industry was dominated by reward-based platforms such as Kickstarter and Indiegogo. Individuals are able to contribute to entrepreneurs and their prototypes in order to help launch projects into market. With hugely successful projects that which quickly went viral, (the most successful project on Kickstarter raised over $20 Million by over 75,000 individuals) reward-based crowdfunding is typically thought of when “crowdfunding” is mentioned.
If you’re looking for a way to discover new innovative prototype products which could become reality very soon, reward crowdfunding is a great way to do so. Since these are prototype projects, there is of course, some risk in terms of getting what you paid for. Issues in manufacturing and shipping often arise and depending on which reward-based crowdfunding platform you use, you may not be able to get your contribution refunded.
Feel Good by Doing Good: Charity Crowdfunding
Probably the least well known, charity crowdfunding is the act of raising funds for charitable causes. Sites such as GoFundMe are known for helping those facing financial issues. Medical bills, college tuition, the purpose of charity crowdfunding offers can differ drastically.
As the name implies, you are participating in charity when you use this form of crowdfunding. Expect no incentive besides the fact that you knew you helped those in need. This form of crowdfunding is a great way to give back to your community or support a friend in need since you can raise funds for them without their knowledge.
A New Form of Crowdfunding Is Now Open: Equity Crowdfunding:
Equity-based crowdfunding is exactly like it sounds. Individuals can help raise money for a company in return for equity (part ownership) of the company. The more you contribute, the larger the part of the company you own. In October 2015, new legislation was passed which changed who could participate in equity crowdfunding. What was once restricted solely to accredited investors (those with huge quantities of money) is now open to the masses.
Unlike reward-based crowdfunding, when you contribute, you don’t receive a physical repayment. Your compensation comes in the form of shares of a company and the potential dividends paid back in future years. There are stacks and stacks of paper regarding the SEC regulations regarding equity crowdfunding since its direct comparison to public trading.
Marketplace Crowdfunding (a.k.a. Peer to Peer Lending)
Also known as Peer to Peer Lending, this form of lending dominates the overall emerging crowdfunding industry in regards to the total amount of capital funded. Marketplace crowdfunding is based on the idea of lending capital to a business with the understanding that the capital will be repaid with interest or profit.
With marketplace crowdfunding, you are rewarded with the repaid profit offered by the businesses. This form of compensation is often considered one of the best ways to grow your wealth considering the high profits offered by companies utilizing marketplace crowdfunding. However, with most marketplace crowdfunding platforms, your contribution could be at risk as the companies you contribute to could default completely and stop paying back. In most cases, collections agencies are involved with limited success.
New companies are emerging which take the benefits of marketplace crowdfunding. Kickfurther, a Top 10 Company in Richard Branson’s 2015 Extreme Tech Challenge, takes the business model of marketplace crowdfunding and applies it to physical inventory. Instead of lending capital, you purchase physical products through a consignment agreement and earn profit as the product you supported sells. These new business models show the potential impact that crowds could have to the $2.6 trillion dollar retail market.
So to recap…
Rewards-based crowdfunding: You give an amount of money in exchange for a reward (often a physical product which was still in prototype stages).
Donation-based crowdfunding: You donate a small amount of money for a charitable purpose without any expectation of being compensated.
Equity crowdfunding: You invest money in a company of your choosing in exchange for equity in the company and possible dividends.
Debt crowdfunding: You lend money to a business with the expectation that they will pay back your support with interest or profit.
When staying abroad I was pretty confused when a waiter asked me whether I wanted to pay in Euros or Dollars after having made a purchase. I leaped at the chance to purchase in dollars, figuring maybe I could avoid a foreign transaction fee from my credit card by doing so, the chase freedom card which charges a 3% foreign transaction fee. The conversion rate they were offering me didn’t seem terrible, about a 2% upcharge from what google told me, so I figured that I’d go ahead and take it. Imagine my surprise when I checked the internet only to find that, according to the internet, I was terribly wrong.
The Internet’s Take
Article after article I checked suggested, in short order that I had been duped by a shady network of banks intent only on robbing me under the thin veil of providing the dubious convenience of paying them substantially more in dollars than my bank might have charged. Some articles I read suggested that fees could be as much as 4-10%! In a panic I went over my account statement and receipt to try to figure out where these nefarious banks were screwing me out of the additional 2-8%. Fortunately for me the answer seemed to be…nowhere.
Chase hasn’t charged me their 3$ foreign transaction fee for that transaction. Maybe that was an oversight on their part, but I’m not sure. My original plan when I visited Europe was to take advantage of Discover’s no foreign transaction fee policy with gusto. There were two problems with this plan. First, I wasn’t able to find basically any place willing to take discover, or as they call it “Diner’s Club International”. Second, I believe this was because I wasn’t able to find that many places that took a card where I was at all anyway!
After making several more transactions I noted that the surcharge being offered in order to pay in dollars rather than euros seems to be quite reasonable. Generally I saw markups between 0 and 5%. Most of which fell between 1-2%. It seems that the banks have gotten substantially less greedy over the years.
While the rule of thumb has always been to go ahead and choose to pay in the local currency, in my case euros. It seems there are occasionally special exceptions. If you are using a credit card with a foreign transaction fee higher than the markup you will pay (most of the time the amount of the markup was advertised before I had to make the choice), it could be in your best interest to go ahead an pay in dollars.
I have read that sometimes your credit card will go ahead and charge you a foreign transaction fee anyway. This is certainly the worst of both worlds.
Of course the real way to solve this problem is simply to avoid it all together. If you use a card which doesn’t have any foreign transaction fees, most travel cards for example, then you simply choose to pay in the local currency every time. This is certainly what I’ll be doing next time I’m abroad. But, for the meantime, if you’re stuck between bank fees, don’t just assume everything you read on the internet is true.
I recently purchased a house and the mortgage company sold my information to a life insurance company. They gave us a call and now we’re a little overwhelmed trying to figure out how to “diversify our finances”. Should I get an accountant? Would he help me with this? We’re a little worried about the additional expense.
The first thing I can tell you Nicole no-last-name is that you probably don’t need to be worried about the additional expense of an accountant. Generally folks in your position hire an accountant because it saves them money. Generally, an accountant also only handles taxes or accounting. Some will give investment advice, and it can be a reasonable way to get it.
The second thing I can tell you requires a little bit of a story: In the nutrition and diet world there is no lack of self-professed guru’s who claim to know the best way for you to lose weight, or the foods that will keep you healthy. They extol the virtues of their particular diet plan. Claiming miraculous results, and always ready to cherry pick examples and studies which support their particular food-cult. If you’ve been steeped in American culture at all in the last 50 years its impossible not to have noticed the endless “now its good for you”, “now its bad for you”. The best nutrition advice I ever got comes from the book “In Defense of Food” by Michael Pollan:
1. Eat Food
2. Not too much
3. Mostly plants
This advice I found particularly wise because of its humility. Rather than making psuedo-scientific arguments about human diet instead it just tells the reader the simple rules that account for most problems.
The investment equivalent of these rules must be:
1. Buy assets
2. Keep fees low.
3. Mostly stocks.
A great way to drive me crazy is to talk about the “investment” you made buying a nice vacuum. There’s nothing wrong with vacuums, but you’re spending money. Investing means to part with money for the time being in order to generate income, while being reasonably certain of the safety of your principal. Buying gold, for example, doesn’t satisfy this first test, as Warren Buffet said it best in his annual letter to shareholders in 2011,
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices. A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Keep fees low
This is where whole life insurance generally fails, as well as funds with “loads”. When you have to pay someone thousands of dollars for an investment they refer to as a “product”, you’re fees are not low. Index funds, from say Vanguard, are a much better candidate. Your money is invested at a rock bottom cost. Sometimes 0.1% of your invested assets.
To be fair, this is perhaps the only piece of my advice that isn’t necessarily timeless. In 1999 it was probably bad advice, but in general it has been good. Over time stocks have been the best or one of the best performing asset classes in the world. It’s easy to see why this is the case. Stockholders are the ultimate owners of the businesses in the world. Gold doesn’t care if you make money or lose money. Insurance exists to protect you from disaster, not to make you wealthy. The raison d’etre of a business it to generate a profit for its stockholders.
Don’t fall prey to snake-oil salesmen. If you follow this advice I don’t promise millions, and I can’t promise that you won’t lose money. There will be times where you will lose hundreds of thousands of dollars. In the long run, however, if you stay invested and ride out the ups and downs of the market I think it’s very probable that you will enjoy a satisfactory return.