Jonathan Clements's Blog, page 11
October 8, 2025
The Inextricable Link Between Risk and Return
Financial history shows us why these promises are too good to be true. Let’s start with perhaps the safest investment in the world - three-month U.S. Treasury bills. From 1926 to 2024, three-month T-bills generated annual returns ranging from a low of approximately 0% to a high of 14%. The annualized return (geometric mean) over this 99 year period was 3.31%. T-bills have not lost money over any calendar year since 1926. Returns were zero in some years, but never negative. Thus, the risk of losing money is zero.
Let's now consider the stocks of small U.S. companies, which are on the high-risk end of the spectrum. Stocks are generally riskier than bonds, and small companies are generally riskier than larger companies because they are more susceptible to market fluctuations and competition, they have limited access to capital, and they may struggle to attract and retain skilled employees. The annualized return for small U.S. stocks was 11.5% between 1926 and 2024, nearly 3.5 times the return of T-bills. However, small U.S. stocks lost money in 35 of those 99 years, sometimes quite a bit of money. In 1937, small U.S. stocks lost nearly 60% of their value!
The data below is the annualized return of five different U.S. asset classes and their probability of losing money in any calendar year over the 1926-2024 period:
Three-month Treasury Bills:
Annualized return: 3.3%
Probability of loss: 0%
Five-year Treasury Notes:
Annualized return: 4.9%
Probability of loss: 12%
Twenty-year Treasury Bonds:
Annualized return: 5.1%
Probability of loss: 26%
S&P 500 Stocks:
Annualized return: 10.5%
Probability of loss: 26%
Small U.S. Stocks:
Annualized return: 11.5%
Probability of loss: 35%
We can use this data to build a simple model of risk and return. Imagine a graph with the probability of loss on the horizontal x-axis and the annualized return on the vertical y-axis. Now imagine plotting the data for each asset class on the graph. The points would rise from the lower left quadrant (low risk, low return) to the upper right quadrant (high risk, high return). This rising curve illustrates the fundamental trade-off between risk and return.
It should be clear from this simple model that high investment returns cannot be earned without taking substantial risk. Safe investments, by their very nature, produce low returns. These are the true facts about the world. To believe otherwise is to completely disregard financial history.
The tragic losses of Mike and Richard underscore the vital importance of financial literacy. By understanding the fundamental trade-off between risk and return, we can protect ourselves from promises that are simply too good to be true.
What models or rules do you use to protect yourself from these types of scams?
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Six T-Shirts and a Car: My Spending Philosophy.
I can never decide if I'm tight, frugal or a spendthrift. I seem to have developed characteristics of all the spending groups. In a nutshell I'm a bit of a consumer paradox. Take the other week.
My wife Suzie and I were out shopping for a pair of trainers for my grandson. I happened to spot a t-shirt that caught my eye, and the best part was the price: it was discounted by a whopping 70%. The quality was good and in my mind It was a great deal, and so I purchased six of them. I admit Suzie's heavenwards eye roll nearly changed my mind.
This kind of purchase I suppose can be viewed in a couple of ways, depending on your perspective. You could see it as profligate spending—buying six of the same item seems excessive to some. Or, you could look at it from my point of view: I was simply optimizing a great discount opportunity.
For me, the decision was simple. I spend a majority of the year in shorts and t-shirts, so having multiple copies of a comfortable top makes getting ready in the morning a breeze. I don't feel the need to stress about my daily wardrobe choices, as long as I know what I'm wearing is clean and fresh. To my mind, that’s a perfect example of a smart purchase. It's simply buying what you need, when it's at its best value, and without overcomplicating things.
I don't consider myself a frugal person, but I definitely need to feel I'm getting good value for my money, and once this tipping point is reached I spend freely without a second thought. It’s a mindset that influences many of my decisions, especially when it comes to big purchases. For example, my last few cars have all been second hand one year old with very low mileage. I would find it stomach-churning to watch 20% or more of a new car’s value disappear the moment I drive it off the lot. I also pay in cash to avoid interest charges.
That same principle applies to everyday things. I like to tinker and fix anything that’s within my skill set. To me, paying someone to do a job I'm capable of doing myself just doesn’t compute. But once it's outside my comfort zone professional services are called upon without batting an eyelid or having any regrets.
Even when it comes to getting to the shops to purchase something I regularly use public transport. First of all it's cheap and saves me money, this soothes my tightness/frugality gene and it's just really convenient with no need for fussing over finding and paying for parking space , I guess it helps that I don’t mind public transit one bit—especially trains, which I genuinely enjoy traveling on, it's a great people watching opportunity and you overhear some interesting conversations…this satisfies my nosy streak, my only problem would be if I see good value discounted trainers, might be difficult getting six pairs home on the bus! But who in their right mind would buy six pairs of trainers anyway?
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Hey Mark, a different take on “fancy” and simplicity.
This will be difficult to make come across as intended, but here goes.
What is the point of being financially secure, of having adequate assets and income and not having a comparable standard of living?
No, it doesn’t mean buying a Vacheron Constantin watch for $195,000, but it also doesn’t mean driving a ten year old junker.
We can claim to enjoy living modestly, “comfortably”, but is it true? Wouldn’t we rather live a bit, just a little bit, above average? To splurge on occasion? It still doesn’t have to be flashy.
To be honest, my life-long goal was not to be average, but neither was it to be wealthy.
Mark talks about simplicity and not being fancy. That’s fine. If that’s what it takes to achieve financial freedom - as it did for us as well, so be it.
However, once achieved, I see no reason to keep playing the game if you miss out on little extras that make you and perhaps others happy.
I drive a Mercedes because it was a dream since I was 18, a dream that took to age 70 to achieve. It’s called a luxury car, but in reality cost no more than many of the SUVs and pickup trucks on the road. The difference may be that I actually bought the car.
Does that car make me fancy, not really. It’s all relative. There are 24 parking spaces in our building garage. Only two spaces have cars that are not a BMW, Mercedes, Jaguar or Porsche, nearly all are leased - the average age of residents is around 75. Looking at any of us would not create an impression of being fancy or wealthy. They all complain about a $50 monthly increase in the HOA fee. Nobody dresses to impress.
I don’t need to buy anything, I don’t need to impress anyone. Hey, I have shoes that are 30 years old. I have ties so old they have gone in and out of style. I never bought designer clothes in my life. I don’t want jeans someone already put rips in the knees. I did spend $350 on a hand made Irish sweater bought in Donegal a few years ago. I didn’t need it, but I wanted it, so I bought it.
Don’t waste, don’t flaunt, don’t deny, enjoy.
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Has the 4% Rule Had Its Day? The Case for Dynamic Retirement Spending
Most people use a version of the 4% SWR in retirement. I think it's the wrong approach for most, although it offers a tempting idea: an extremely high probability of not running out of money and genuine income stability. These reasons are its biggest Achilles heel—it causes the median retiree to pass with a large amount of unspent wealth. Many studies suggest two-thirds to four-fifths of retirees end with a portfolio equal to or larger than their starting balance.
This reality stems from the rule's design. The creator identified the worst possible 30-year period and calculated the largest withdrawal rate so the portfolio lasted 30 years.
Safeguarding against ruin is the flaw in the system. If you happen to experience your retirement in any timeframe that doesn't emulate the worst-case scenario—which means nearly every retirement—you end up with a large portfolio balance at the end of life. Statistically, most could have had a more comfortable retirement with higher spending levels.
The rigidity of the rule makes things worse. It demands that a retiree take an inflation-adjusted withdrawal every year, regardless of market performance. In a good year, this fixed withdrawal is too low, leaving significant growth unspent. In a bad year, a temporary reduction in spending could substantially protect the portfolio, but the rule prescribes moving ahead with the inflation adjustment anyway.
In my mind, for the typical retiree, the 4% rule presents a bit of a conflict. Is your goal really just seeking a 100% guaranteed promise of your portfolio lasting, and be damned about a large ending balance, or is it maximizing lifetime spending and enjoying the retirement you worked so hard for?
I'm drawn towards the idea of dynamic withdrawal strategies—they're gaining traction with financial planners. Cynics might suggest it's because a dynamic strategy is a bit more complex, and some might prefer using a professional to run the plan, earning fees for the planner.
/https://www.whitecoatinvestor.com/guyton-klinger-guardrails-approach-for-retirement/
However, the benefits are clear: These flexible strategies use fairly simple rules that increase your spending above inflation during good years and require no increase or small decreases during bad years. This lets you catch more of the market's "upside" and significantly lowers the possibility of large unintended inheritances while still providing a high level of portfolio security.
I think the 4% rule is a good big-picture planning guide. Unfortunately, its very foundational ethos is more likely than not acting as a brake on what most of us could spend during retirement. Taking a closer look at these guardrail systems could let the majority spend more freely without much compromise…other than in the size of your final balance.
When a respected organization like Vanguard is citing dynamic withdrawal as a better pathway for lifetime income, I think it's time we all have a closer look at the 4% SWR system. Could it possibly have had its day?
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THE GOOD OLD DAYS OF HEALTH INSURANCE
This is from my blog, but I thought interesting. You may recognize the doctors name from recent posts.
The idea of health insurance is generally said to have begun in the 1940s, but consider this.
Early in his career (around 1815) in an attempt to build his practice in Philadelphia, Dr. Philip Physick offered the first healthcare insurance package in the country. He advertised that he could take care of an entire family for a year for $20.
Dr. Physick is known as the father of American surgery.
But some things never change🤔
Physick pursued wealth and had an income of $20,000 a year (equivalent to $343,600 in 2024) and invested nearly all his surplus wealth in real estate, which at the time of his death was valued at half a million dollars (equivalent to $13,895,588 in 2024.
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October 7, 2025
Nothing Fancy, That Works for Me.
My car is parked in a driveway with space for maybe 4 cars. It's an 8-year-old SUV with 80,000 miles on the clock, well serviced and maintained. Nothing fancy. I bought it at one year old, saving on the big first year depreciation.
If a passer-by ever spotted me regularly, they'd see me in shorts, a t-shirt, and scruffy sneakers. Once again, nothing fancy. Spending big bucks on designer clothing doesn't work for me.
This phrase weaves through my life. The sports facility I belong to isn't an expensive members-only place—it's municipally owned and managed, open to everyone. Nothing fancy. Also at least $2000 cheaper every year.
The ultimate expression of this outlook is my financial portfolio: a mix of low-cost Vanguard index funds, an annuity, a bond ladder, and some cash savings. Nothing fancy going on there. Doesn't seem right for me to pay 1% for active management.
I won't pretend I'm not financially comfortable. But it's straightforward: I wouldn't be as comfortable if I hadn't been content with simplicity. If I hadn't been fine with nothing fancy. The appearance of wealth has never interested me.
I'm sure flashier people might look at my life and shrug—"nothing fancy." They'd be right. And I'm perfectly fine with that.
After all, there's nothing fancy going on here. True wealth is not the ability to buy expensive things, but the freedom gained from not needing to buy them. That really works for me.
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October 6, 2025
Financial wisdom from Jonathan
Great article and tribute about Jonathan in the New York Times. This is a link to it that hopefully you can read without a subscription.
https://www.nytimes.com/2025/09/23/bu...
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Medicare Advantage update- it may be a bumpy ride.
Predictions are the trend to enroll in Medicare Advantage plans will slow and MA plans will be forced to trim benefits. A recent article on MarketWatch provides more analysis.
Many seniors still like MA plans for their extra benefits and generally lower premium costs, but they don’t like limited networks, required referrals, deductibles and co-pays in some cases.
But that is not the problem.
According to the (10/4/25) article, “The market (for insurers) remains lucrative as the government pays 22% more per Medicare Advantage enrollee, or about $83 billion a year more, than if that person had been enrolled in traditional Medicare, according to the Medicare Payment Advisory Commission, the independent federal agency that advises the U.S. Congress on issues affecting the Medicare program.”
MA plans were supposed to save Medicare money. Why the reverse was allowed to happen is questionable. Probably poor management, but no doubt politics as well.
In any case, sooner or later MA beneficiaries will pay more, receive fewer benefits or in some cases their plan will disappear.
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Are You a Trader or an Investor?
What immediately popped into my mind was I am not, nor do I want to be, a brilliant trader. I want to be a brilliant investor (hardly the case but I’m trying).
What about you? Do you aspire to be a brilliant trader or a brilliant investor? For I think they are totally different creatures.
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October 5, 2025
The beauty of simplicity …. I wish I wrote this
Every now and then I read an article and think "Wow, I wish had written than". I'm sure I'm not alone.
Recently I came across this article from Safal Niveshak, which is part tribue to Jonathan Clements, and part ode to simplictiy.
https://www.safalniveshak.com/money-i...
My favourite passage:
"A simple equity fund, a fixed-income option, and plain insurance are enough for most of us. But the industry thrives on multiplying choice because that’s how assets are gathered. Each new fund or product adds jargon, adds fees, and adds confusion. Bad for the buyer, but wonderful for the seller!"
We might argue a little about the details, but I wholeheartedly agree with the spirit of the article.
After reading this article, I was keen to see what else Niveshak has written. Somewhat ironically, the homepage of his website screams
"Pick winning stocks using my free, automated stock analysis Excel"
I'm not sure this really aligns with the aim of simplicity! However, the article remains a great read. Good day to you all.
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