This headline grabbed my attention: U.S. Propane Market Headed for ‘Armageddon’ This Winter, IHS Says.
The research firm quoted, IHS Markit Ltd., is predicting a shortage of propane in some regions of the U.S. before the end of winter, along with increasing prices that are already 50% higher than they were in October 2020 and the highest they’ve been since 2014.
Heating bills will probably be higher for everyone this winter, as the average cost to heat a home with electricity is expected to increase by 6%, natural gas by 30%, and heating oil by 43%. But costs are projected to increase by 69% to $1,805 for an average home heated with propane in the Midwest, according to the U.S. Energy Information Administration.
Three years ago, everyone on our street had an opportunity to convert their homes from propane to natural gas when Duke Energy agreed to cover the cost of running the necessary infrastructure to our neighborhood, as long as most of us signed up. Some of our neighbors, who had been instrumental in persuading Duke to run the lines, changed their minds about converting to gas after they researched the cost. Appliances had to be purchased or converted, plumbing had to be run inside the house, and yards would be damaged to make room for the new lines. It was a big, upfront cost. But few homes are still heated with propane, and delivery can be an issue in colder winters with occasional shortages causing prices to jump significantly, so we made the change with the idea that we would recover our expenditure over time. I just didn’t expect the payback to come this soon.
You may have experienced a few situations in your own life when you’ve felt you were being asked to pay an upfront cost or put in what felt like a lot of effort in exchange for the promise of a future benefit. Putting together a financial plan and sticking to an investment strategy can require both.
When we begin a relationship with a client at TAAG, we have several steps to work through together to make sure we understand the values that motivate them, to identify the issues they want to address, and develop the base plan we’ll use and update as things change throughout their lives. While it can be difficult to motivate yourself to spend the time you have left after work, family, and other priorities to work on a plan, this upfront investment of time can create wealth and save you significant money:
- Setting up a 529 Plan for your kids or grandkids is far more impactful the earlier you get an account started. To cover 100% of the cost of an average in-state college you’d need to deposit $675 a month when your child is born. As time passes the numbers become a bit staggering. Wait until Kindergarten and you’ll need to save $825, and by the time they reach 10 it’s $1,200. You can learn more about the pros and cons of 529 plans by reading Sarah’s blog here.
- Reviewing your insurance coverage can prevent you from missing coverage gaps and save you money without taking on significant risks. I recently reviewed our home and auto insurance and saved 30% after making some changes. Michael provided an overview of property and casualty insurance and what to consider as you look at your own coverage in his 2-part blog linked above.
- Comparing your retirement plan investment options and setting the right allocation early can help build your wealth much faster and prevent missed opportunities. I recently worked with a client who discovered he had funds left behind in a previous employer’s plan that had been auto invested in a money market fund earning nearly nothing for the last several years.
These are only a few examples. Even after your plan is in place a regular review of your financial situation can benefit you as your goals shift over time and retirement plans and tax rules constantly change.
While setting up a plan takes an investment of time, a disciplined investment strategy can cause you to feel you’re giving up too much financially in the present.
With mostly positive returns in all equity asset classes over the past 11 years, unrealized capital gains are significant in many portfolios. There is a temptation to hold onto assets as they climb, even when they become a larger percentage of the portfolio than we targeted when we set an asset allocation goal. We have a discipline in place to sell these excess amounts and reposition the proceeds into underperforming assets. But who wants to sell their winners?! Why would you want to recognize gains and pay taxes?! The upfront cost of both seems too high.
No investment appreciates forever in a straight line. And while we know that intellectually, we don’t always accept it emotionally. Time and time again we have seen investments that only seemed to grow in value suddenly deflate due to financial issues caused by poor management, changes in society’s opinion, or unexpected events like the Financial Crisis, Brexit or Covid. It may feel that you’re giving up a chance to make a killing by selling off a portion of your investment holdings to reallocate them into underperforming investments today, but in 2007 the 39.8% return for emerging markets shifted to a loss of 53.2% the next year, followed by a 79% gain in 2009. While few investment classes have the same volatility, there are still wide swings elsewhere. Investing in small U.S. companies (the Russell 2000 index) after they posted a loss of 4.4% in 2015 rewarded you with a gain of 21.3% in 2016.
When we sell off a portion of an investment portfolio to rebalance, not only are we reducing your holdings in one of your ‘winners,’ you also must recognize the gain and pay taxes, which can feel like an unnecessary cost as well. But the tax payment is much less painful than watching an investment drop significantly in value – particularly if it is an oversized portion of your portfolio. Maximum long term capital gain rates have been as high as 39.875% in the past compared to their relatively low 20% today, which makes the expense a little easier to take, and TAAG works to minimize gains with our portfolio reviews and communicates with your tax preparer. But taxes are a reality that won’t go away, and they’ll continue to be a cost of keeping portfolios in balance and achieving longer term positive returns.
Paying a plumber, reseeding a yard, and converting our propane stove and furnace among other things felt like an expensive step back for us, but like planning and rebalancing, taking the time and spending some funds today will pay off well into the future.