Business & Economics: February 2006 Archives
Being newly-married, my wife and I have frequently discussed our career goals and how we want to manage our family both now and in the future when we have kids. I grew up in a family in which both of my parents worked outside the home, but when you run the numbers it often turns out that two incomes aren't better than one.
The main culprits for the financial failure of second incomes are a tax system that savagely penalizes second incomes and the high cost of quality child care. The result, among financially savvy couples with a single high wage-earner, is that spouses with much less earning power often stop working until the kids are in school. Those who stay on the job do so not for the money, but for the challenge and fulfillment they derive from work outside the home. ...Peggy Ruhlin, a financial planner and certified public accountant in Columbus, Ohio, found it necessary to relate some hard truths about second incomes to her clients. She cites the case of a highly paid executive whose wife worked for a government social work agency. Her position was consuming and paid less than $25,000 a year, but it was deeply satisfying because she was helping people in need. Ruhlin ran through the numbers and showed that the wife was taking home a grand total of $1,500 a year when all was said and done. ...
Ruhlin says the Social Security cut was especially unkind because, on retirement, the wife will be entitled to the equivalent of half her husband's entitlement (he'll still get the full amount) even if she never worked at all. Her contributions from a relatively low-wage job would never entitle her to more on her own, and so her payments will never do her any good.
On top of all this were child care, commuting and other expenses. When the planner broke the news, the woman became teary-eyed. She started considering volunteer work with more flexible hours.
Even aside from tax considerations and other costs mentioned in the article, there are plenty of intangible benefits to having an adult focus on managing the home.
(HT: Sound Mind Investing Blog.)
Update:
Further, on the myth of the working mother:
George Gilder points out that "women in the home are not performing some optional role that can be more efficiently fulfilled by the welfare state. Women in the home are not 'wasting' their human resources. The role of the mother is the paramount support of civilized human society. It is essential to the socialization of men and of children. The maternal love and nurture of small children is an asset that can be replaced, if at all, only at vastly greater cost. Such attention is crucial to raising children into healthy productive citizens. In other words, 'the hand that rocks the cradle rules the world.'"
Another giant leap towards modernizing the real estate industry courtesy of Zillow, a site that blends a Google-Maps-like interface with a database of county real estate records and provides a bunch of tools for estimating house values. I could waste all day browsing the site.
There's all sorts of reasons why a "windfall-profit" tax on the oil industry would be a terrible economic and political decision, but aside from the blatant immorality of stealing money from stockholders just because they've got it, there's a very insidious underlying assumption: why does anyone think that Congress can spend that money better than the companies' shareholders?
These large oil concerns are already subject to a 35% corporate income tax rate, and record profits mean commensurate tax payments to the federal Treasury. According to a new report from the Washington-based Tax Foundation, Exxon, ConocoPhillips and Chevron paid a combined $44.3 billion in corporate income taxes in 2005, or 49.2% more than the $29.7 billion they paid the previous year.Furthermore, says the report, "the average effective tax rate on the major integrated oil and gas industry is estimated to equal 38.3%. This exceeds the estimated average effective tax rate of 32.3% for the market as a whole." In other words, even without Congress' would-be ex post facto confiscation of profits, energy companies are already providing the Members with a "windfall" to use to finance their 14,000 spending earmarks.
Some of the same politicians calling for these punitive measures also fantasize about "energy independence," while blocking methods to achieve it. Washington Senator Maria Cantwell, for instance, has sent letters to regulators demanding investigations into why there aren't more refineries in the U.S., but she supports restrictions on refineries in Puget Sound. Senator Byron Dorgan of North Dakota wants a 50% tax on the price of oil above $40 per barrel and would exempt companies that invest in new energy production. Yet Mr. Dorgan opposes new energy production in places where companies want to explore, such as the Arctic National Wildlife Refuge and the Outer Continental Shelf.
I'd support a Constitutional amendment that fires every government employee, elected or appointed, who makes over $100,000 per year and bans them from ever again earning a nickel from the public treasury. We need a government that stays out of our business and shows a lot more humility by recognizing that it doesn't have the solution to every "problem".
It's a little-talked-about secret in the investment world that Morningstar ratings are nearly meaningless, and it looks like their Manager of the Year awards are pretty pointless too. (Those links are probably subscriber-only and points to an article in this month's newsletter from Sound Mind Investing.)
Morningstar is much in the news these days with the naming of their "Manager of the Year" awards. How to do they pick these folks, you might ask? If my recent look at their "international" manager finalists is typical of their overall approach, then I think it's safe to say that Morningstar marches to a different drummer than the rest of us. ...For 2005, their three finalists averaged gains of 20.5%. Our four current foreign funds averaged 32.5%. The two we added in recent months, as you might expect, have great records this year. That's how they climbed to the top of our rankings. But even the other two, both of which we held all year, averaged 26.8%. So, what makes the Morningstar finalists so special?
A Morningstar spokesperson says: "While we certainly seek to recognize managers who've had an outstanding year, we're also looking for those who've built solid long-term results. Simply put, one year of shooting out the lights won't cut it. We also consider the stewardship of the fund and favor managers who have tried to do right by their shareholders."
Aaah... so one good year isn't enough. Ok, how about three? The three Morningstar finalists averaged 24.9% for the three-years ending December 31; our funds averaged 35.9%. Hmmm. Maybe they're looking at five-year records. Given that the past five years included some difficult times, it makes for more of a test. Let's see... theirs averaged 7.0%, ours averaged 9.8%.
As Austin Pryor points out, I'm not sure what could be better "stewardship" than great performance over time. As the first link notes about Morningstar's star rating system:
A table in their report shows that over the three-year period tested, the average U.S. stock fund that sported a 5-star rating on June 30, 2002 went on to return 10.1% annually from July 2002-June 2005. There are a couple of interesting things about this. First, Morningstar says that this return of 10.1% was equivalent to a fund being ranked in the 43rd percentile. Isn't that a little surprising? These are their best funds under a new, improved system, and they're only good enough to rank, on average, in the 43rd percentile? Given that the M* rating system is fairly complicated and that the analysts are some of the sharpest number crunchers around, you would expect better.Second, the fund groups that received 4-, 3-, 2-, and 1-star ranked in the 49th, 50th, 53rd, and 54th percentiles respectively. Aside from the fact that 5-star funds didn't deliver great performance, we also see that there's not much of a performance difference between the other star groups. 4-star funds are in the 49th percentile while the 1-star group is in the 54th percentile? That just doesn't seem like much of a drop given the "image gap" between a 4-star fund and a lowly 1-star fund.
Don't rely on Morningstar ratings for making investment decisions.
