WSJ 2
SUNDAY, DECEMBER 22, 2013
THE JUGGLE ON SUNDAY
Our Daughter Wants to Be Very Rich BY LAURA KREUTZER
Two months ago, we took our daughter to see a production of the musical “Annie” as a special treat for her eighth birthday. I thought that she would enjoy the story of a plucky redheaded orphan’s unrelenting optimism in the face of adversity (not to mention the fact that we’re partial to almost any tale with a redheaded heroine). But I fear she related more to Daddy Warbucks. “Mom, what job makes the most money?” Neva asked me a few weeks after her birthday. “Why do you ask?” I asked her. “Because when I grow up, I want to be rich,” Neva said. “We are rich,” I countered with my go-to response whenever this topic comes up. “We are rich in family and friends. We are rich in love and kindness, and we’re practically millionaires in creativity.” “No, Mom,” Neva countered with a groan and mild roll of her hazel eyes. “I want to be rich for real and live in a mansion.” i i i I realize that Neva is hardly the first child to express a desire for material wealth. But something about her declaration struck an emotional chord. Don’t get me wrong: I have nothing against her wanting to be wealthy. I am not one of those people who believe that the wealthy are inherently corrupt or motivated solely by greed, any more than I would believe that the poor are inherently honest and good. However, I also realize that the pursuit of wealth solely for wealth’s sake is often a “thin soup,” as my father would say. And so while I do want our daughter to possess a level of financial savvy and ability to support herself, I don’t want her to buy the false promise that the pursuit
AL’S EMPORIUM
Christmas Gifts for Goofs BY AL LEWIS
It’s almost Christmas and I’m still going through my closets to see what I can regift to the many great business and economic minds on my list:
Nathalie Dion
of material wealth on its own is the key to happiness. It’s easy, of course, to blame the culture for all this. It’s hard to avoid the celebration of wealth that’s all around us—at the movies, on TV, in the marketing messages that bombard us. Yet I also can’t help but wonder whether we aren’t contributing, even if unintentionally, to our daughter’s materialistic bent. Often, when Neva needles me for something that she wants at the mall, my inevitable comeback is either, “Sorry, not today, that’s too expensive” or, “We can’t afford that right now.” Typically, neither is true. We could afford the object of her desire; we just choose not to buy it. In other words, my effort to keep Neva grounded may instead have given her the false impression that we are worse off financially than we really are—and a strong desire to right that wrong. Not surprisingly, on more than one occasion, Neva has asked if we are poor. i i i To get an expert opinion on all this, I reached out to Liz Warrick, a private parenting coach in Winchester, Mass.
Ms. Warrick counsels that it’s important for parents to teach children, even young children, how to make smart choices with money so they get a more realistic grasp of the trade-offs that come with those choices. “There’s so much emphasis on material things in our culture,” she says. “We live in a culture where there’s immediate gratification and many kids get what they want at a very young age.” She suggested we give Neva an allowance so she can start making her own spending choices, but with a requirement that she save a certain percentage of the money she receives and that she also donate a certain percentage to charity. Researching different charities in our area and allowing her to pick out which ones she would like to support will help her better grasp her own good fortune. She also recommends that the next time Neva asks me to buy something, rather than telling her that we can’t afford it, I explain instead that, although we may be able to afford it, we choose to spend our money differently. “If [you] keep paying attention to the fact that things
cost money and [you] can’t afford it, then that thought becomes overwhelming,” she said, adding that once Neva starts receiving an allowance we can also offer her a choice of whether or not she wants to spend her own money on a particular item, even if it turns out to be junk. Finally, she adds that the holidays offer a chance to demonstrate that happiness isn’t tied to money, by emphasizing joyful activities that don’t cost much and aren’t tied to material things. Given how much Neva and I both love Christmas carols, baking and oddball homemade craft projects, I think I’ve already got a head start on that one. Neva may or may not grow up to be a wealthy adult. But we hope that by incorporating these suggestions, we can do a better job of teaching our daughter about the many blessings in her life. That way, she will come to realize that in the things that truly matter, she always was and always will be rich. Laura Kreutzer is assistant managing editor of private equity in the newsletter group at Dow Jones. Write to her at SundayJuggle @wsj.com.
For President Obama, I found a bright-yellow book: “Building a Website for Dummies.” For Thorsten Heins, former CEO of BlackBerry: Etch A Sketch. Ohio Art will be around a lot longer than BlackBerry. How about Meg Whitman? Hewlett-Packard stock traded at more than $45 a share when she joined its board in January 2011. She was named chief executive in September 2011 and by November 2012 the stock traded below $12. H-P has since returned to profitability and the stock now trades above $28. The improvement has been largely driven by cost cutting and mass layoffs. For this performance, Ms. Whitman just got a 50% raise, from $1 million to $1.5 million in annual salary. I’m giving her the Easy Bake Oven. Jamie Dimon, J.P. Morgan Chase’s chief executive, agreed to several multibillion-dollar legal settlements this year all because of ambitious employees within his giant bank who can’t stop monkeying around with other people’s money. I’m getting him Barrel of Monkeys. But Mr. Dimon may never get all the monkeys out of the barrel. Federal Reserve Chairman Ben Bernanke spent $3 trillion reviving the economy. Now he’s retiring and leaving the Fed’s unprecedented financial position to Janet Yellen. Here’s a game they can play under the Christmas tree: Don’t Spill the Beans. AOL Chief Executive Tim Armstrong lost his cool and fired a guy during a live conference call with 1,000 employees. Mr. Armstrong has
had to fire a lot of folks with the shutdown of Patch, a collection of local-news websites. He’ll probably be good at Whac-A-Mole. I’m getting a DVD for former Apple executive Ron Johnson, who became CEO of J.C. Penney and nearly destroyed the iconic retailer: “Wreck-It Ralph.” Internet Movie Database describes the film: “A videogame villain wants to be a hero…but his quest brings havoc to the whole arcade.” Jacob Lew, former chief operating officer of too-bigto-fail Citigroup, became our nation’s 76th Treasury Secretary. This is like putting a BP executive in charge of the Environmental Protection Agency. I’m buying Mr. Lew a rubber chicken. Maybe it will keep him from the rest of the hen house. Mary Schapiro stepped down as head of the U.S. Securities and Exchange Commission and joined the board of General Electric, a company her agency sued three times for fraud and kickback schemes. For her, the copsand-robbers play set by Playmobil. I hope she won’t have trouble picking which side she wants to be on. Robert Benmosche, CEO of bailed-out insurance giant AIG, defended the $450 million in bonuses paid to employees after AIG’s near-collapse. He said criticism of the bonuses “was intended to stir public anger, to get everybody out there with their pitchforks and their hangman nooses, and all that—sort of like what we did in the Deep South.” He sounded like he wanted a new necktie, but I’m going to get him Minion Tim, a singing action figure based on the film “Despicable Me 2.” Does anybody out there have a Christmas-gift idea for a famous underperformer? Post it at tellittoal.com/xmas. Al Lewis is a columnist based in Denver. He blogs at tellittoal.com; his email address is al.lewis@tellittoal.com
INVESTING BASICS
PERSONAL BUSINESS
Holiday Credit Offers Can Cost You Art Imitates Life, but Seldom the S&P BY DENNIS NISHI
As we head into the final stretch of the holiday shopping season, there’s no shortage of loan offers from banks and credit-card lenders. Convenience checks and deferredbilling promotions fill mailboxes with seemingly generous zero-interest terms and 12 months to pay. But are these offers really worth the cost? Most financial experts urge caution, as many offers come with hidden costs.
Deferred Billing
Many retailers work with banks to offer financing that gives shoppers more time to pay for purchases. Cost: You pay no interest if the balance is paid when due. If it’s not, you could end up paying months or years of back interest. Hidden costs: You lose all the perks offered by regular credit cards, such as damage and theft protection. Also, a leisurely payment schedule could burden your credit score
for long periods and raise the rate you’d get on other loans— notably when dealing with retailers that offer two or three years of deferred billing for big-ticket items like furniture. Read the fine print to see how the debt gets reported. Some lenders may not start reporting until the payment comes due, says Rod Griffin, director of public education for credit-data company Experian.
Convenience Checks
As common as fruitcake around the holidays, they allow bank customers to tap unsecured credit lines simply by tendering a check. Cost: Since convenience checks are regarded as a cash advance, many banks levy a 3% to 4% fee upfront, tack on high interest and start charging interest upon purchase. Hidden costs: Depending on your debt load, convenience checks can send internal red flags to your card issuer, says Mr. Ulzheimer. “Externally, it won’t affect your credit score
anymore than a regular loan would, but sudden use of them can make you look desperate and compel your credit issuer to re-evaluate your creditworthiness.”
Skip a Loan Payment
Most lenders allow customers to “skip” a loan payment once a year. Cost: Depending on your interest rate, you could end up paying twice the skipped amount in interest (extending your loan by as much as two months per skipped payment) and a $25 to $35 fee. Hidden costs: Because you’ll be paying past the loan’s original maturity date, there’s a slight chance that future lenders will interpret negatively how the payment is reported. Keep any paperwork from your lender in case it comes up, as during a mortgage-loan application, says Mr. Griffin. “You should also check your credit report if there are concerns,” he says. Email: sjdnishi@gmail.com
ASK DOW JONES
Working Abroad May Have Benefits BY TOM HERMAN
Q:
If I move overseas and work there next year, will I still have to pay U.S. income taxes on the income I earn abroad? —R.B., New York City
A:
As with many tax questions, it depends on numerous details. If you’re a U.S. citizen or resident alien, “your world-wide income generally is subject to U.S. income tax, regardless of where you are living,” the Internal Revenue Service says. That’s true whether you work in Rome, Italy, or Rome, Georgia. Even so, large numbers of Americans who live and work abroad qualify to exclude part or all of what they make. The answer hinges on such factors as how much they earn while working abroad and whether they qualify for the “foreign earned income exclusion.” If you do qualify, you can exclude as much as $99,200 of foreign earned income during
2014, up from $97,600 this year, the IRS says. You might also be eligible for other breaks, such as excluding or deducting certain foreign housing expenses paid for you or incurred by you —and you might be able to exclude the value of employerprovided meals and lodging. The fine print can be remarkably tricky. Consider consulting an experienced tax pro. Some general rules: “Foreign earned income” doesn’t include all types of income. It typically includes income for personal services (such as salaries, wages, commissions, bonuses, tips and professional fees). It doesn’t include “unearned” or investment income (such as dividends, interest, capital gains, Social Security benefits, pensions, annuities, gambling winnings and alimony). To be eligible for the foreign earned-income exclusion, the housing exclusion or the housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be:
A U.S. citizen who is “a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,” or A U.S. resident alien who is “a citizen or national of a country with which the U.S. has an income-tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,” or A U.S. citizen or a U.S. resident alien who is “physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.” The rules have other twists and turns. For details, see IRS Publication 54 (“Tax Guide for U.S. Citizens and Resident Aliens Abroad”) and Publication 15-B.
Send your questions to us at askdowjones.sunday03@wsj.com and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter.
BY CAROLYN T. GEER
What does it take to invest in art? An unlimited budget helps, judging from recent headline-making auctions, in which Norman Rockwell’s “Saying Grace” sold for $46 million, a record for an American painting, and Francis Bacon’s triptych “Three Studies of Lucian Freud” sold for $142 million, a record for any work of art at auction. Or you could take a cue from Herbert Vogel, a onetime postal worker, and his wife, Dorothy, a librarian, who amassed a collection of 5,000 contemporary works over the course of their 50-year marriage with “wits and guts,” as Mr. Vogel once put it. “If you’re rich, it’s easy to start a collection,” he reportedly said. “But if you need your paycheck to pay the rent and phone bill, and you want to collect, you’ve got to depend on instinct. What you feel in your head and your heart.” Regardless of whether you have the money or the wits and guts to collect, the question remains, should you? Or, as a team of economists recently set out to determine, does it pay to invest in art? Using a sample of more than 20,000 paintings sold repeatedly at auction between 1972 and 2010, the economists assembled a traditional “repeat sales” index—the kind often used to estimate returns on “alternative” asset classes, such as art and real estate. The average annual return for the index was 10%, besting the 7.3% annualized total return for the S&P 500 stock index over the period. This suggests art is such a solid investment that—by standard asset-allocation methods—you should devote one quarter to one half of your portfolio to it. “The problem is, that’s not quite the case,” says Arthur Korteweg, a finance professor at Stanford University and a researcher involved in the study. The actual returns you can expect from art are far less than 10%, he and his col-
Jon Reinfurt
leagues from the Luxembourg School of Finance and Erasmus University Rotterdam discovered. The underlying cause of the overstated returns is something called “selection bias,” which Mr. Korteweg says is endemic to indexes built on repeat sales of relatively illiquid assets not sold at random. Simply put, some of the paintings in the index changed hands more frequently than others in the index. The more a painting appreciated, the more likely it was to trade, creating a sharp upward bias for the index. After accounting for this sample-selection problem, the researchers determined that a more representative return for the universe of paintings was only 6.5%. Their conclusion: “Our results show that investors should optimally forego investing in paintings, even without considering transaction and insurance costs, and the risks of forgeries, theft and physical damage, unless they are able to pick winners or there is substantial nonmonetary utility from owning and enjoying art.” Like a stock picker, an art investor could try to identify “hidden gems,” selectively investing in styles or artists before they become hits, “but that does require a lot of skill, foresight and probably some
luck,” says Mr. Korteweg. “It’s also not a bad idea to buy something you like,” he adds. At least then you’ll reap psychic dividends, which is the “finance-y” way of thinking about this, he says. Which brings us back to the Vogels. “We never bought anything because we thought it was important,” Mr. Vogel once said. “We bought things we liked.” And that they could afford, carry home on the subway, and fit into their small New York apartment. This led the Vogels to acquire works that were not in demand—at least not yet—resulting in an “eclectic” collection of pieces created early in artists’ careers, as well as “less-expensive works on paper by artists traditionally known for other media,” according to an exhibition catalog by the Yale University Art Gallery in New Haven, Conn., which is showing part of the Vogel collection. (Before Mr. Vogel’s death last year at age 89, the couple donated 50 works to selected art institutions, one in each of the 50 states. “That their holdings comprise a first-rate collection of Minimal and Conceptual art was actually almost a coincidence.” To find pieces of the Vogel collection in your state, see vogel5050.org. investingbasics.wsj@gmail.com