FINANCIAL PLANNERS often ask new clients about their first money memory. Mine was about an early encounter with inflation. It involved a favorite childhood snack named fuchka, a popular street food in Kolkata, where I grew up. The snack is a ball-shaped flatbread, filled with spicy potato mash and topped with tamarind water. As you crunch its crispy shell, the magical flavors burst in your mouth and take your tastebuds on a rollercoaster ride. As a child, this occasional savory treat was my main motivation for earning pocket money. In my elementary school days, our neighborhood street-food vendor used to sell three pieces for 10 paisa—roughly one cent at that time. I rarely had more than five paisa, for which the vendor gave me just one piece. I challenged his math and demanded fairness. Pestered by this argumentative little boy, he agreed to give me an extra piece with every other purchase. I felt proud of my negotiation skills. My joy didn’t last long. Out of nowhere, the vendor raised the price to two pieces for 10 paisa. No more extra pieces for me. This came as a surprise. My little mind couldn’t comprehend how and why prices could increase overnight. Angry and frustrated, I ran home to my mother and drew her attention to this injustice. To my disappointment, my mother seemed more sympathetic toward the vendor than her own son. She told me that prices go up over time but couldn’t explain why. Her advice: Sign up for more chores to boost my pocket money. My childhood snack is 100 times pricier these days, compared with a threefold rise in U.S. hot dog prices over the same period, reflecting India’s far higher inflation rate in recent decades. Today, inflation doesn’t surprise me. What does is the realization that my…

MY FRIEND JIT learned the hard way that you can never be too careful when dealing with a financial advisor. Despite being a cautious and responsible investor, he made one small oversight—and ended up with his money trapped in an unsuitable product. I’ve known Jit for more than 15 years. He’s smart and financially savvy. He saves diligently and manages his own investments. He funds his son’s 529 plan, maxes out his 401(k), uses the backdoor Roth and so on. He does pretty much everything that a rational, informed investor should do. A few years ago, he consolidated his investments at a single online brokerage firm. He qualified for the firm’s complimentary advisory service, so he decided to get feedback on his existing investments from his designated “account consultant.” Jit’s consultant made a few sensible suggestions and quickly earned Jit’s trust. Jit had a large amount of cash from some recently matured CDs. He debated whether to pay down his mortgage or put the money in the stock market. Tax was a consideration, too. He checked with his consultant. The consultant suggested putting the money in the market. Given Jit’s risk tolerance and overall situation, this was good advice. The advisor, however, directed Jit’s attention to a retirement product with unlimited after-tax contributions and tax-deferred growth—in other words, a variable annuity. Jit had no interest in the lifetime income option, but the advisor argued that the product itself had no surrender charge and that the balance could be withdrawn in part or whole without annuitizing. The goodwill the consultant had already earned, coupled with convincing charts about the value of tax-deferred growth, swayed Jit. He moved a good chunk of his cash into the annuity and invested it in one of the annuity’s investment options, a total stock market index…

I WAS PLEASANTLY surprised recently when a lump-sum dividend payment showed up in my brokerage account. It was from a preferred stock I bought a few years ago to boost my investment income. The windfall reminded me of the three criteria I’d used to screen preferred shares: Taxation. Unlike bond payments, which are taxed as ordinary income, the income payments from most—but not all—preferred stocks enjoy the favorable tax treatment given to qualified dividends. Since my investments were in a taxable brokerage account, I avoided preferred stocks that didn’t offer this favorable tax treatment. Callable. Preferred stocks typically don’t have a set maturity date, but many of them are callable at the issuer’s discretion. I decided not to pay more than face value for a preferred stock if the call date had already passed or was approaching soon. A few of my preferred stocks have been called away over the years. But since I bought them at a discount, the extra buffer—the difference between the face value and my purchase price—was a consolation. Cumulative. If a bond misses a coupon payment, the creditors can go after the company. Not so with preferred shares. The board of directors can suspend all dividend payments indefinitely to preserve capital. When things look up, and the company can afford dividend payments again, it must resume the preferred stock dividend before that of the common stock. But what about the missed payments in the intervening period? This is where the cumulative feature comes into play. All unpaid dividends of a cumulative preferred stock must be paid before resuming common stock dividends. I opted to exclude noncumulative preferred stocks from my holdings. My surprise lump-sum payment was from the cumulative preferred shares of Pacific Gas and Electric, the San Francisco-based utility. The company got into legal…

AN UNPLEASANT PRICE shock awaits those who grew up in a low-cost-of-living nation and then relocate to a high-cost country. Coming from India, I experienced it firsthand, as I routinely converted prices into Indian rupees and compared them to the cost of similar items back home. In my initial years abroad, this made it challenging to open my wallet. Everything appeared overpriced. It took time to come to terms with the fact that, despite higher living costs, I could still afford most necessities, thanks to my higher income. Continually calculating prices in Indian rupees became increasingly illogical and tiresome. Nevertheless, I couldn’t entirely abandon the habit. Instead, I adopted a simplified approach, one that factored in differences in purchasing power. My new calculation: I’d append a zero to the local price—effectively multiplying it by 10—and consider that figure as the “affordability-adjusted” price in Indian rupees. For instance, if the $20 price tag for a haircut had me pondering a ponytail instead, my thought process would be as follows: If I still lived in India, instead of relocating abroad, would I hesitate to spend 200 Indian rupees to appear well-groomed? Why did I choose to add a zero, instead of relying on the official currency conversion rate? The exchange rate sometimes made the cost in rupees seem exorbitant. But I instead focused on the average salary in both countries of a software engineer, which is my profession. For instance, if a software engineer in the U.S. earns a salary of $100,000, the same person in India might earn 10 times that amount in Indian rupees, or 1 million rupees. If the U.S.-based engineer considers the price of a haircut to be reasonable, then the engineer in India should likewise regard the “affordability adjusted” price—the rupee price with an extra zero added…

IT BAFFLES ME that people often favor stock-picking over index funds—and yet they fail to measure their portfolio’s performance against a proper benchmark. I’m not talking about those who buy a few individual stocks for entertainment or education. For them, it’s a worthwhile pastime and the stakes are low. But there are others who ignore the evidence and arguments against active management, and devote serious money to picking stocks and timing the market in hopes they’ll earn market-beating returns. This group includes a number of people I know—folks I otherwise admire for their intelligence, critical thinking and self-awareness. These acquaintances are do-it-yourself investors who actively manage their investment accounts, and they do so with confidence. I’ve probed a little to find out what lies behind this confidence. My conclusion: Improper benchmarking is a common cause. In other words, many think their strategy has played out well, but—in reality—their investments have lagged behind an appropriate market benchmark. Why don’t they realize this? I’ve spotted two mistakes. First, they’re misled by the outsized performance of a few stock picks. I have a friend from work, whom I’ll call Techie. A few years ago, he researched and bought a dozen stocks—all members of the popular Nasdaq 100 Index. A few years later, Techie’s picks rode the bull wave upward. Two stocks did especially well, the rest not so much. The net result: Techie’s portfolio underperformed the indexes that his investments should have been benchmarked against. Yet the outperformance of the two picks, coupled with his portfolio’s overall gain, gave Techie false confidence in his stock-picking skills. That brings me to the second error that I’ve seen drive overconfidence. This mistake affects people who make regular contributions to—and withdrawals from—their investment account. At issue is comparing an account’s dollar-weighted return to a benchmark index’s time-weighted…

THE AGE-OLD DEBATE about not borrowing to buy depreciating assets came up again in a recent HumbleDollar article. Despite being a big proponent of debt-free living, I could relate to the story of borrowing to buy a car. In fact, I’m guilty of having gone deeply into debt in my younger days to feed my passion for music—and I don’t regret it. I grew up listening to Indian music of various genres, but it wasn’t until my college days that I came to really appreciate the sound quality and texture of music. Our dorm had a high-fidelity stereo, plus a decent collection of vinyl records and audio cassettes. I’d spend hours in the common room, listening to classic rock or favorite Bollywood film scores. My newfound love of music, alas, came to an end after I left college and moved back home to Kolkata. We had a portable radio and cassette player in our house, but it didn’t satisfy my craving for quality sound. My life felt so incomplete without a good audio system that I decided to buy one once my paychecks started coming in. I grabbed a coworker named Natesh, who shared my love for music, and we visited an upscale audio showroom near our office. Luckily, the store stocked a nearly identical sound system to the one in my dorm. It was a top-of-the-line modular audio system named Uranus 2 by Sonodyne, one of the most innovative stereo makers in India. I instantly fell in love with the set and wanted to take it home. There was just one small problem. I couldn’t afford it. In the late 1980s, premium audio products weren’t cheap in India. The model I wanted would cost almost a year of my take-home pay. That helped explain why the salesperson didn’t take us…