Jonathan Clements's Blog, page 13
July 31, 2025
Bad Trip
Chris tripped and fell a few Sundays back. Her radius and ulna bones broke and the elbow was beyond repair. We were on a little day trip, to visit the Cleveland Aquarium.
Come the next day, the anticipated 2-3 hour surgery stretched to 7 hours. Afterwards, the surgeon, allegedly among the finest in the country for this particular procedure, reported good results. However, coming out of the long anesthesia, Chris had difficulty communicating, so was quickly rushed down the hall for an MRI. The nurses had explained the test was necessary to be certain there had not been a stroke. All Chris heard was the word stroke. When I was finally allowed into recovery, I found Chris, her face all scrunched up, struggling to hold back tears, as she waited for the results of the test. Seeing Chrissy like that made my eyes well up too. Luckily, my marginally inappropriate bedside sense of humor kicked in, and I soon had us both, as well as a couple nurses, laughing through the tears. The MRI was fine, still, our day trip would be extended a couple more days for observation.
So far things are going as they should for Chris, though her recovery will be lengthy.
It was only supposed to be a day trip. We were stuck, 100 miles from home, with no change of clothes, no meds or C-Pap contraption. Thanks to MyChart, meds were no problem for Chris. I went without my meds until I made a round trip home on Tuesday; the only one I really missed was the Rx for my restless legs. For future day trips, perhaps I will put together a go-bag with a few emergency essentials that can’t be easily purchased from a nearby department store.
Accidents happen in a heartbeat. We did okay because we were close to home, but real vacations require a little more planning. Things like proper travel insurance to pay for emergency transport home from a foreign country, or proper auto insurance if you are renting a BMW in the UK.
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I Cry More Easily Now. I Didn’t Use To
I didn’t use to understand that kind of emotion. When I was about 11, I was watching television with Uncle Lou. I don’t remember how old he was, but he was retired, and to a young kid, he seemed ancient. At one point, he started to cry. I didn’t understand why — the film didn’t seem that sad to me. But now, at 74, I do. I, too, get emotional at times without knowing exactly why.
A few years ago, I went to a gathering for Jeremy, a high school friend who had passed away. The mood was upbeat — people were eating, drinking, and chatting like it was a neighborhood get-together. I had fun seeing some of my old childhood friends.
Jeremy’s daughter spoke first, offering a few touching words about her father. Then Ron stood up, notes in hand, and started cracking jokes about Jeremy’s drinking habits — like how he could fall asleep holding a drink and never spill a drop. He kept going until his wife nudged him to wrap it up.
I had planned to say something about a different side of Jeremy — the responsible guy who always held a job from high school graduation until retirement. I thought that deserved recognition. But suddenly, I felt overwhelmed with emotion. I couldn’t explain why. This wasn’t a somber funeral — it felt more like a casual celebration.
I just sat there, silent. I knew I wouldn’t be able to hold it together. It didn’t feel like the right time or place to get emotional and risk dampening the mood. Everyone was there to celebrate, not mourn.
Looking back, I wonder why I was so emotional. These days, my oldest friends and I are gentler with each other, more appreciative of our connection. As you get older, the value of those relationships becomes more apparent.
If I reacted so strongly to Jeremy’s death, I can’t imagine how I’d handle losing my wife. My mother struggled with my father’s death. When my father passed and I started spending more time with her, she sometimes called me Sam, my father’s name. I took her to see a couple of therapists. One sold her his book, and mostly talked about himself. She even tried attending church again. But none of it relieved the pain she was feeling.
I think it was because she never gave herself time to grieve. She cleaned out his closet and packed away his things quickly, hid the photos, thinking that erasing reminders would ease the pain.
I’d do the opposite.
Rachel likes to keep her laptop on the dining room table, right by the sliding glass door, where the light pours in and the morning breeze flows through. It only gets moved when we have company. If, God forbid, something ever happened to her, I wouldn’t move it.
I found out early in our relationship how much Rachel values greeting cards. When I give her one for a special occasion, she always keeps it by her laptop for weeks, until it eventually finds its way upstairs to a shelf in our hallway, displayed alongside all the other cards I’ve given her. I would keep those cards right where they are.
Those things — her pictures, her favorite places, her saved notes — would hurt to see and remind me of her every day. But I think they’d help me heal. I’d want to give myself the time and space to feel the loss and the sadness, not run from it.
I’ve learned from my mother that ignoring grief doesn’t make it go away. Facing it — little by little, everyday — might be the only real way through.
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July 30, 2025
The Dividend Reinvestment Puzzle
The names of equity-income funds imply that they are aimed at investors who desire to withdraw their higher dividends as cash flow for spending. On the other hand, equity funds are aimed at investors who seek to reinvest their lower dividends for capital appreciation. However, more than 74% of equity-income investors reinvest their dividends—a reinvestment rate similar to that of investors in equity funds. Why do investors who reinvest their dividends choose equity-income funds? This is what is called “the dividend reinvestment puzzle.”
Behavioral Finance
In their seminal 1984 paper, “Explaining Investor Preference for Cash Dividends,” Hersh Shefrin and Meir Statman offered a solution to the dividend puzzle—framing, mental accounting, and self-control. “Investors frame dividends into an income mental account, along with wages, whereas they frame capital into a capital mental account, along with retirement savings. Investors who withdraw money from their portfolios for spending, such as in retirement, use the self-control rule of ‘spend income but don’t dip into capital’ to prevent excessive spending. Investors who perceive selling shares to create homemade dividends as dips into capital prefer company-paid dividends over homemade dividends. Indeed, evidence indicates that investors place dividends in the income mental account ready for spending, whereas they are reluctant to dip into the capital mental account by selling shares.”
The full article is at The Dividend Reinvestment Puzzle: What It Means For Investors (fa-mag.com)
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Regular HD writers, readers and commentators are just not normal- in a good way
Over the several years I have been writing and commenting on HD it has been made clear that the HD community includes many sophisticated investors and planners. People who use budgets, track expenses, do their best to investigate and then make financial decisions based on information they develop. They use various type of software programs and, of course, their own spreadsheets. They analyze risk and investment expenses. They like details. They think about the future. And, it appears, they have been doing all this for many years.
See, the HD community is just not normal. They are financially literate while several reports indicate Americans score less than 50% on basic financial literacy tests- really basic. The lack of financial knowledge is estimated to cost Americans billions of dollars annually through poor decisions, overwhelming debt, and insufficient savings.
We talk about financial education a great deal, but we have a long way to go. While many HD readers and writers are comfortable with details in various ways, many people - me included- are not that thrilled with all the math, assumptions, etc. It seems to me we need to present financial matters in the simplest form possible. For example:
Save, never pay credit card interest, spend.
Compounding interest is your best friend.
Invest in index funds and never stop.
Only use debt for necessities such as a home or car, but at a level you can afford that does not interrupt saving and investing.
Start early and be patient.
What ideas do you have?
What DON’T many, perhaps most, Americans know?
1. How Compound Interest Works
Many people don’t fully grasp how interest accumulates on savings or debt.
🔹 2. Credit Scores
Few understand how scores impact loan interest rates, renting, or even job prospects.
🔹 3. Budgeting and Spending
Overspending on housing, cars, or subscriptions is common.
Financial literacy surveys show only about 40% of U.S. adults use a monthly budget. No comment from me on this one except a budget doesn’t really stop overspending, common sense does 😎
🔹 4. Debt Management
Misunderstanding how minimum payments work.
Lack of awareness about student loan terms, interest rates, and repayment options.
🔹 5. Investing Basics
Many avoid investing out of fear or lack of knowledge.
Misunderstandings about:
Stocks vs. bonds
Risk and diversification
Long-term gains and inflation
Over 60% of Americans don’t invest outside of retirement accounts.
🔹 6. Retirement Planning
Don’t know how much they’ll need to retire.
Think Social Security will fully cover expenses.
Don’t understand 401(k)s, IRAs, or employer matches.
🔹 7. Taxes
Confusion about tax brackets (many think all income is taxed at the highest bracket).
Misunderstanding deductions vs. credits.
Underutilization of tax-advantaged accounts (e.g., HSA, 529 plans).
The post Regular HD writers, readers and commentators are just not normal- in a good way appeared first on HumbleDollar.
The Accidental Stock Picks in Our Index Fund Portfolio
Our holdings are Barclays plc (BARC), the banking giant, and abrdn plc (ABDN), the asset manager. Like many investors, we've held onto these shares, perhaps longer than strictly rational, definitely the case with Aberdeen, allowing sentiment and inertia to play their part. But beyond that attachment, there are some lessons to be learned from their contrasting performances.
Let's start with Barclays, acquired through stock options Suzie exercised, the star performer of our duo. That 53% capital gain over the past year isn't just luck; it's a sector riding a favourable wave. Banks thrive on economic stability and, crucially, higher interest rates. Efforts to curb inflation have given banks a wider margin between what they pay on deposits and what they earn on loans. This, combined with strong financial reporting and investor confidence in the sector, has propelled Barclays' share price upwards.
The 2.3% dividend yield acts as a nice bonus. It's not a sky-high income, but it's a solid return for simply holding the shares. The underlying strength suggested by the capital gain also points to a healthy outlook for future dividends. It's easy to see why we're reluctant to part with this one – why sell a winner?
Then there's Aberdeen, my asset management holding, first acquired in 2006 for absolutely zero cost with additional shares acquired by a dividend reinvestment plan. Its 6% gain looks somewhat lacking in comparison to Barclays. Asset managers often face headwinds: market volatility can shrink the value of assets they manage, and there's constant pressure on fees from cheaper passive investment options like Vanguard, my main holding. Sort of like shooting myself in the foot!
However, Aberdeen excels with its excellent 8% dividend yield. If I was an income-focused investor, that's incredibly attractive. It's like a steady stream of cash directly into your pocket, which definitely softens the blow of less impressive capital growth. The dilemma here is whether such a high yield is sustainable. A very high yield can sometimes be a red flag if a company's share price has fallen significantly, making the dividend payout appear large.
Our out of character holdings highlight a common investor's conundrum. Do you hold onto a high-growth stock that's still showing momentum, or do you favour a high-yielding one that provides consistent income? There's no single right answer but I like the gains and I like the yield!
Both companies represent different sides of the financial sector, which means we have a small amount of our holdings tied up there. While Barclays offers impressive growth, Aberdeen provides a compelling income stream. So totally by accident and with absolutely no strategy we've ended up with one growth and one dividend stock.
This is what I would tell anyone who asks about them, but deep down, I just like the idea of owning a few real company shares. And I'm keeping them just because I want to. In an ideal analytical world we should have a written statement of what metrics would apply to trigger a sale. But in our slightly flawed human world forgetting about them until the next AGM reminder is the likely outcome. Slightly irrational, but that's the psychology of money in operation once again I guess.
The post The Accidental Stock Picks in Our Index Fund Portfolio appeared first on HumbleDollar.
July 29, 2025
Family Dynamics, Part 3: What Do Adult Children Owe Their Aging Parents?
My musings on all three of these topics are specifically related to how complicated the interaction between family dynamics (especially if it's a "difficult" family) and our finances can be. This one focuses on how caring for parents as they age can raise challenging questions.
Like many of you, I'm at the stage of life where I view these questions both as a daughter and as a parent. The parameters and principles I hold to right now (about the older generation) could well be turned around to apply to me and my husband, and that all factors in to how I think about these matters.
Anyway, let's dig in. I see two separate but related sets of factors or questions.
Financial/Practical Questions
If the aging parent needs regular or even daily assistance, are you willing and able to provide it? How might time spent fixing up their home, driving them to appointments, buying groceries, cooking, cleaning, and more, affect your own financial situation, especially if you're still working? What about your ability to care for yourself and your own family, if you have one? What if you don't live anywhere near them?
If the parent says something like "I want to live out my years in my own home. Don't ever put me in assisted living"--are you (and your siblings, if applicable) able and willing to help make that happen? Will a family member move in with them? Will you have to provide the care yourself, or pay for in-home caregivers? If the parent has their own means to pay for help, who will be in charge of arranging and overseeing that care? If there are gaps in coverage, who will solve that problem?
If the parent either agrees to move into a residential care situation or is unable to make those decisions for themselves (because of cognitive or physical limitations), do they have the means (funds or long-term care insurance) to pay for it? If not, are you able and willing to chip in or pay for it entirely? Who will find the facility, and who will oversee the parent's care once they've moved in?
Relational Questions
Do you have a warm, supportive relationship with this parent, or is it a difficult relationship? How does the quality of the relationship affect your answers to the above practical questions? (Should it?)
Has your parent made financial/life decisions over the years that have put them into a precarious situation now? While perhaps it's not your place, as the child, to judge them, is it then your responsibility to make sacrifices to cover up for their (maybe bad) decisions?
How would it be received if, for example, you suggested the parent apply for Medicaid to cover long-term care instead of paying for it out of resources that you will need for your own retirement years?
There are bigger ethical and philosophical questions to consider, too. After all, it was the parent's decision to bring the children into the world, not the other way around. So in what sense does a child "owe" them anything? The traditional answer to that, of course, is that family love and loyalty should transcend generations: We care for our parents when the need arises and we hope that our children will do the same for us when the time comes. But what if that isn't a realistic expectation, either because you don't have children or other family members who would or could care for you, or because giving the parent what they "want" (for example, years of in-home care or a more deluxe residential facility) would harm your own ability to care for yourself and your own children (if you have them)?
"My kids will handle it when the time comes" is the easy answer for many people. Obviously for some people, that's no answer at all. But is it ever the best answer for anyone, and if so, under what conditions?
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A Teenager’s Walk Through the Stock Fund Wilderness
and I took the one less traveled by
And that has made all the difference
--Robert Frost
The Road Not Taken, 1915
I have volunteered to teach a module on stock fund investing for students taking a new elective course at a small private high school in Sacramento. Here is a fleshed out outline of what I’m thinking about presenting. I want to educate “my kids” about the factors that ushered in the advent of the index fund and ETF and how to distinguish between the virtues and vices of their investment options. In the process, I’ll shine a light on those TV commercials showing an advisor in a tweed jacket speaking patronizingly about what to do now in a voice dripping with sincerity.
Above all, I want these 18-year-olds to feel confident and not be intimidated by advisors, brokers or their apologists. In short, I hope to add a few names to the small cadre of informed young consumers of the stock market. To be sure, nothing has been finalized after an enthusiastic handshake with the head of the high school in the spring, so all this may be the ramblings of an old fool on a belated mission. By the way, if anyone can use this article as a refresher or has a kid about to take the dive, that would be a joy.
The Road Is Long, with Many a Winding Turn
Learning how to invest in the stock market is a lot like learning how to drive. Done wisely, it will get you to where you want to go—a life of financial well-being and money for college, your first home, raising your children, and then their college. Done recklessly, investing in stocks is fraught with danger. Over the last twenty years, the overall stock market has gained an average of almost 10% a year. Pretty cool, right? But a sputtering economy and extremes of human emotion can cause this gradually rising slope to be temporarily disrupted by violent downside episodes of more than 40% a year.
After bear markets, though, the inexorable march upward resumes. How can I be so arrogant and so sure? Because it always has. Stocks have tended to finish higher over 80% of the time across ten years and over 90% across twenty. They have overcome the Crash of 1929, the dot.com technology massacre at the turn of the century and the mortgage lending fiasco of 2008.
Rolling the Dice with Individual Stocks
Buying individual stocks is risky, too risky for most of us. If management executes poorly and earnings disappoint or if the public loses confidence in its product, you will feel the pain. Boeing’s stock lost 23% in a few days following its two tragic air accidents in 2019. What could that mean for you? Well, the $1,000 your parents set aside for college textbooks is now $770.
Single-stock risk is particularly perilous. Even Apple has sustained staggering blows on the way to investor nirvana, plummeting over 50% in 2008. Sure, rooting on your individual picks is challenging and fun, but serious investing needs to be more than that—certainly so when replenishing your tuition savings account or beginning to save for a down payment. Many have said that diversification js the only free lunch on Wall Street.
What’s a Mutual Fund, Anyway?
Let’s say your mom would love to have a second home in Tahoe, but she only has half the money needed for the down payment. She enlists two women friends to invest 25% each into a chalet. Your mom owns 50% and each of her friends owns one-fourth. The three partners will divvy up any gain or loss in the value of their mountain retreat according to their proportionate share. A mutual fund works much the same way. People pool their money to buy stocks, with each person owning the percentage of shares represented by the size of her investment.
Cost: The Achilles Heal of Professionally-Managed Funds
The modern era of mutual fund investing that began in the 1920s solved the problem of diversification by providing instant ownership of a large number of stocks. Until the 1980s, virtually all mutual funds were actively-managed by a professional stock picker. His mission was to replace stocks deemed overvalued with those believed to be undervalued to maximize the fund holder’s profits.
This oversight freed investors from having to monitor developments in their individual stocks, opening up time for leisure pursuits or, of course, (ugh!) homework. The aura of professional supervision is particularly attractive to individuals---including many students—without the time, ability or desire to manage their own finances.
But hold it. These features of the active mutual fund must be weighed against a stark disadvantage. The prodigious costs of maintaining a mammoth research division to turn up ideas for the portfolio managers have proven a stubbornly high hurdle for them to clear
Index Funds: The Portfolio Manager Has No Clothes
Until the mid-1970s, the commonplace assumption was that portfolio managers’ trading skill enhances the performance of their funds. It was a slam dunk. After all, many of them had Ivy League pedigree and most were educated in elite business schools. It was around that time that several market observers began to question the seemingly unassailable conviction that the quality of professional management determines the success of a mutual fund.
These renegades constructed an index fund consisting of all the stocks in the S&P 500. No portfolio management or trading was done, so that the fund’s holdings were fixed. As you might imagine, these skeptics were ridiculed as naïve and traitorous by brokers and advisors whose livelihoods were on the line.
But the early results with the index (or passive) fund were encouraging and stimulated considerable academic research. Over the last twenty-five years, literally hundreds of studies have confirmed that gains from actively-managed mutual funds generally do not exceed those for similar index funds. In fact, the results for index funds often eclipse those with portfolio managers. In 2024, active funds surpassed the S&P Index fund less than 25% of the time.
Just how cheap are index funds, anyway? They usually cost about one-third as much as active funds and fees for many of the largest passive funds are so low as to be incidental. Let’s bring that notion closer to home. Say your parents have socked away $50,000 toward your first two years of college tuition and associated expenses and put half into a savings account. They allocate the remaining $25,000 to Vanguard’s S&P 500 Index fund. What is their total annual cost? $1,000? Nope. $500? Uh-uh. Try $10 (not a typo), folks, and that includes all operational and administrative expenses in addition to the management fee itself.
Passive funds are no longer the poor kid on the block. In response to investor demand, thousands of index funds have been launched, ranging from highly diversified broad market indexes like the S&P 500 to specialized offerings in areas like aerospace and real estate. With a boost from the financial media and grudging acceptance by the formerly disdainful professional establishment, a cadre of informed mutual fund consumers has been born. I want you to be one of them.
The ETF Is Not The New Model Jaguar
By the turn of the century, the actively-managed mutual fund was fast becoming a dinosaur. Its egregious management fees were exposed by the more efficient index fund and savvy consumers were transferring their assets from one to the other. Asset management companies, which had gorged on their expensive actively-managed funds for seventy-five years, were hemorrhaging money and shedding investors. At the same time, developers of the index fund were emboldened by its stunning success. These two unlikely bedfellows were scrambling for a new consumer-friendly product. They found it in the exchange-traded fund (ETF),
The ETF structure has several advantages over active management and even the index fund, which is actually a subclass of the mutual fund. Though much cheaper, index funds carry other baggage of their active counterparts. Passive funds cannot be bought or sold during the market day, but only at the closing price. They are also subject to the annoying restrictions often placed on mutual and index fund investors, though limitations on the number of times you can return to a fund you recently exited would typically not apply to long-term holders of index funds.
By contrast, the ETF wrapper goes way beyond the features of actively-managed mutual funds. Since the ETF is just a new way to package passive funds, they are likewise cheap. No buying or selling occurs in either index funds or ETFs, which also share favorable tax treatment not accorded their active brethren. ETFs are also more flexible than mutual funds and passive funds, allowing trading whenever the market is open, just like a stock.
Does all this good come with any bad? Well, the flexibility of the ETF has come under scrutiny for its susceptibility to the kind of frenzied trading that gives rise to the speculative juices. Ironically, rampant short-term trading may well be deterred by the rigidity of mutual funds’ transaction rules. And to be sure, ETF trades take place in an auction-like market with a spread between the bid and ask prices, whereas mutual and index funds are bought and sold at the closing net asset value. The friction of the ETF is a cost that makes them less amenable to accumulating or withdrawing shares repeatedly in a college savings or retirement plan.
Despite these reservations, the ETF is one of the most successful financial products ever created. Although not yet a topic of conversation at the local club, the ETF has become the darling of the investment community. By the end of 2024, assets in ETFs represented fully one-third of those in all stock funds.
As of mid-2025, there were about four-thousand ETFs in the U.S. and ten thousand internationally. Similar but in many ways superior to index funds, they facilitate investment in widely followed market benchmarks like the Dow and S&P, as well as tap into thematic trends like biotechnology and real estate. ETFs exist for expressing values through investing, like religious beliefs and sustainable farming. Learning how to invest through funds reflecting personal interests is a great way for you to get started. Remember, diversification and time are on your side, so save, invest and be patient.
Active Management Descends on the ETF
You’d better look now because they’re coming. The established asset gatherers were hit by a double-whammy. First, their lucrative actively-managed mutual fund model was overrun by the proliferation of index funds of all stripes. And then the entire mutual fund design—including the subclass of index funds—was supplanted by the entirely new ETF structure. But don’t sell the enterprising fund providers short. As investors fled their costly and outmoded mutual funds for streamlined ETFs, the big boys needed a new gig. Ever inventive, they fashioned a new version of the ETF with, of course, active management.
All those portfolio managers who failed to outrun passive funds were retooled to pilot ETFs artfully priced between the cost of the mutual fund and index ETF. The marketing allure of a relatively cheap ETF combined with button-down surveillance has been breathtaking. In the last two years, new active ETF offerings have far surpassed those for index ETFs. The revamped ETF has also been stealing market share from its predecessor.
The Showdown
Whether the relocated portfolio managers will be able to tease out better results than they did steering their mutual funds seems a stretch. Unfortunately, since very few active ETFs have been around for more than a few years, little academic study comparing their performance against passive ETFs has been done to deliver a verdict. Until more research is available, we won’t know if the active ETF is indeed the Holy Grail or just another fool’s paradise.
The post A Teenager’s Walk Through the Stock Fund Wilderness appeared first on HumbleDollar.
July 28, 2025
A Teenager’s Walk Through the Stock Fund Wilderness by Steve Abramowitz
Two roads diverged in a wood,
and I took the one less traveled by
And that has made all the difference
--Robert Frost
The Road Not Taken, 1915
I have volunteered to teach a module on stock fund investing for students taking a new elective course at a small private high school in Sacramento. Here is a fleshed out outline of what I’m thinking about presenting. I want to educate “my kids” about the factors that ushered in the advent of the index fund and ETF and how to distinguish between the virtues and vices of their investment options. In the process, I’ll shine a light on those TV commercials showing an advisor in a tweed jacket speaking patronizingly about what to do now in a voice dripping with sincerity.
Above all, I want these 18-year-olds to feel confident and not be intimidated by advisors, brokers or their apologists. In short, I hope to add a few names to the small cadre of informed young consumers of the stock market. To be sure, nothing has been finalized after an enthusiastic handshake with the head of the high school in the spring, so all this may be the ramblings of an old fool on a belated mission. By the way, if anyone can use this article as a refresher or has a kid about to take the dive, that would be a joy.
The Road Is Long, with Many a Winding Turn
Learning how to invest in the stock market is a lot like learning how to drive. Done wisely, it will get you to where you want to go—a life of financial well-being and money for college, your first home, raising your children, and then their college. Done recklessly, investing in stocks is fraught with danger. Over the last twenty years, the overall stock market has gained an average of almost 10% a year. Pretty cool, right? But a sputtering economy and extremes of human emotion can cause this gradually rising slope to be temporarily disrupted by violent downside episodes of more than 40% a year.
After bear markets, though, the inexorable march upward resumes. How can I be so arrogant and so sure? Because it always has. Stocks have tended to finish higher over 80% of the time across ten years and over 90% across twenty. They have overcome the Crash of 1929, the dot.com technology massacre at the turn of the century and the mortgage lending fiasco of 2008.
Rolling the Dice with Individual Stocks
Buying individual stocks is risky, too risky for most of us. If management executes poorly and earnings disappoint or if the public loses confidence in its product, you will feel the pain. Boeing’s stock lost 23% in a few days following its two tragic air accidents in 2019. What could that mean for you? Well, the $1,000 your parents set aside for college textbooks is now $770.
Single-stock risk is particularly perilous. Even Apple has sustained staggering blows on the way to investor nirvana, plummeting over 50% in 2008. Sure, rooting on your individual picks is challenging and fun, but serious investing needs to be more than that—certainly so when replenishing your tuition savings account or beginning to save for a down payment. Many have said that diversification js the only free lunch on Wall Street.
What’s a Mutual Fund, Anyway?
Let’s say your mom would love to have a second home in Tahoe, but she only has half the money needed for the down payment. She enlists two women friends to invest 25% each into a chalet. Your mom owns 50% and each of her friends owns one-fourth. The three partners will divvy up any gain or loss in the value of their mountain retreat according to their proportionate share. A mutual fund works much the same way. People pool their money to buy stocks, with each person owning the percentage of shares represented by the size of her investment.
Cost: The Achilles Heal of Professionally-Managed Funds
The modern era of mutual fund investing that began in the 1920s solved the problem of diversification by providing instant ownership of a large number of stocks. Until the 1980s, virtually all mutual funds were actively-managed by a professional stock picker. His mission was to replace stocks deemed overvalued with those believed to be undervalued to maximize the fund holder’s profits.
This oversight freed investors from having to monitor developments in their individual stocks, opening up time for leisure pursuits or, of course, (ugh!) homework. The aura of professional supervision is particularly attractive to individuals---including many students—without the time, ability or desire to manage their own finances.
But hold it. These features of the active mutual fund must be weighed against a stark disadvantage. The prodigious costs of maintaining a mammoth research division to turn up ideas for the portfolio managers have proven a stubbornly high hurdle for them to clear
Index Funds: The Portfolio Manager Has No Clothes
Until the mid-1970s, the commonplace assumption was that portfolio managers’ trading skill enhances the performance of their funds. It was a slam dunk. After all, many of them had Ivy League pedigree and most were educated in elite business schools. It was around that time that several market observers began to question the seemingly unassailable conviction that the quality of professional management determines the success of a mutual fund.
These renegades constructed an index fund consisting of all the stocks in the S&P 500. No portfolio management or trading was done, so that the fund’s holdings were fixed. As you might imagine, these skeptics were ridiculed as naïve and traitorous by brokers and advisors whose livelihoods were on the line.
But the early results with the index (or passive) fund were encouraging and stimulated considerable academic research. Over the last twenty-five years, literally hundreds of studies have confirmed that gains from actively-managed mutual funds generally do not exceed those for similar index funds. In fact, the results for index funds often eclipse those with portfolio managers. In 2024, active funds surpassed the S&P Index fund less than 25% of the time.
Just how cheap are index funds, anyway? They usually cost about one-third as much as active funds and fees for many of the largest passive funds are so low as to be incidental. Let’s bring that notion closer to home. Say your parents have socked away $50,000 toward your first two years of college tuition and associated expenses and put half into a savings account. They allocate the remaining $25,000 to Vanguard’s S&P 500 Index fund. What is their total annual cost? $1,000? Nope. $500? Uh-uh. Try $10 (not a typo), folks, and that includes all operational and administrative expenses in addition to the management fee itself.
Passive funds are no longer the poor kid on the block. In response to investor demand, thousands of index funds have been launched, ranging from highly diversified broad market indexes like the S&P 500 to specialized offerings in areas like aerospace and real estate. With a boost from the financial media and grudging acceptance by the formerly disdainful professional establishment, a cadre of informed mutual fund consumers has been born. I want you to be one of them.
The ETF Is Not The New Model Jaguar
By the turn of the century, the actively-managed mutual fund was fast becoming a dinosaur. Its egregious management fees were exposed by the more efficient index fund and savvy consumers were transferring their assets from one to the other. Asset management companies, which had gorged on their expensive actively-managed funds for seventy-five years, were hemorrhaging money and shedding investors. At the same time, developers of the index fund were emboldened by its stunning success. These two unlikely bedfellows were scrambling for a new consumer-friendly product. They found it in the exchange-traded fund (ETF),
The ETF structure has several advantages over active management and even the index fund, which is actually a subclass of the mutual fund. Though much cheaper, index funds carry other baggage of their active counterparts. Passive funds cannot be bought or sold during the market day, but only at the closing price. They are also subject to the annoying restrictions often placed on mutual and index fund investors, though limitations on the number of times you can return to a fund you recently exited would typically not apply to long-term holders of index funds.
By contrast, the ETF wrapper goes way beyond the features of actively-managed mutual funds. Since the ETF is just a new way to package passive funds, they are likewise cheap. No buying or selling occurs in either index funds or ETFs, which also share favorable tax treatment not accorded their active brethren. ETFs are also more flexible than mutual funds and passive funds, allowing trading whenever the market is open, just like a stock.
Does all this good come with any bad? Well, the flexibility of the ETF has come under scrutiny for its susceptibility to the kind of frenzied trading that gives rise to the speculative juices. Ironically, rampant short-term trading may well be deterred by the rigidity of mutual funds’ transaction rules. And to be sure, ETF trades take place in an auction-like market with a spread between the bid and ask prices, whereas mutual and index funds are bought and sold at the closing net asset value. The friction of the ETF is a cost that makes them less amenable to accumulating or withdrawing shares repeatedly in a college savings or retirement plan.
Despite these reservations, the ETF is one of the most successful financial products ever created. Although not yet a topic of conversation at the local club, the ETF has become the darling of the investment community. By the end of 2024, assets in ETFs represented fully one-third of those in all stock funds.
As of mid-2025, there were about four-thousand ETFs in the U.S. and ten thousand internationally. Similar but in many ways superior to index funds, they facilitate investment in widely followed market benchmarks like the Dow and S&P, as well as tap into thematic trends like biotechnology and real estate. ETFs exist for expressing values through investing, like religious beliefs and sustainable farming. Learning how to invest through funds reflecting personal interests is a great way for you to get started. Remember, diversification and time are on your side, so save, invest and be patient.
Active Management Descends on the ETF
You’d better look now because they’re coming. The established asset gatherers were hit by a double-whammy. First, their lucrative actively-managed mutual fund model was overrun by the proliferation of index funds of all stripes. And then the entire mutual fund design—including the subclass of index funds—was supplanted by the entirely new ETF structure. But don’t sell the enterprising fund providers short. As investors fled their costly and outmoded mutual funds for streamlined ETFs, the big boys needed a new gig. Ever inventive, they fashioned a new version of the ETF with, of course, active management.
All those portfolio managers who failed to outrun passive funds were retooled to pilot ETFs artfully priced between the cost of the mutual fund and index ETF. The marketing allure of a relatively cheap ETF combined with button-down surveillance has been breathtaking. In the last two years, new active ETF offerings have far surpassed those for index ETFs. The revamped ETF has also been stealing market share from its predecessor.
The Showdown
Whether the relocated portfolio managers will be able to tease out better results than they did steering their mutual funds seems a stretch. Unfortunately, since very few active ETFs have been around for more than a few years, little academic study comparing their performance against passive ETFs has been done to deliver a verdict. Until more research is available, we won’t know if the active ETF is indeed the Holy Grail or just another fool’s paradise.
The post A Teenager’s Walk Through the Stock Fund Wilderness by Steve Abramowitz appeared first on HumbleDollar.
A Personal Encounter with the Psychology of Money
It all started when I was setting up a 10-year fixed-term annuity before retirement. I had initially decided on a purchase amount and, to fund it, liquidated some of my developed world index tracker. I moved the cash into my Vanguard money market fund to keep the money safe prior to the annuity purchase.
After more research and some analysis, I decided to purchase a smaller annuity, leaving me with approximately $120,000 still sitting in my money market fund. Because of market behaviour this last while, I kept putting off reinvesting the money back into the original fund it came from.
I've looked at it nearly every other day for the last three months, and I couldn't pluck up the nerve to simply reinvest. It's absolutely ridiculous, and the annoying thing is I knew I was being pretty dumb and needed to get a grip, but man, was it hard!
I got a severe case of status quo bias with a large helping of loss aversion, all wrapped in a blanket of analysis paralysis, and I'm here to tell you it's as real as a brick wall and nearly as hard to knock down. I was literally mentally stuck and couldn't execute a simple financial transaction for three months—unbelievable.
I think this experience has really hit home that financial decision-making isn't purely rational, even with my strong business and financial background. Emotions, biases, and an irrational fear of making a "wrong" move overrode my logical understanding. I guess this is why personal finance is often called personal as much as finance.
I'm really annoyed with myself, but at least I've eventually taken the plunge back into the market. The next time I hear someone talking about behavioural finance, I'm actually going to hear them and internalise it as best I can.
I guess you have two options: chuckle at my self-inflicted misfortune, or perhaps take it on board and reflect on how a reasonably financially self-assured and experienced investor got blindsided by the psychology of money. I suggest the latter.
For my own sadness and everyone else's benefit, I just asked Google Gemini to tell me the opportunity cost over the last 90 days. $11,500– that's how much my indecision has cost. I'm now going to sit down in a dark room for a few hours. Have a good day.
The post A Personal Encounter with the Psychology of Money appeared first on HumbleDollar.
A Personal Encounter with the Psychology of Money.
I've been in a bit of a financial funk these last three months, and I've finally managed to overcome my heart and listen to my head. I'm really surprised how difficult I've found it, especially with my business and financial background. I mean, truly difficult.
It all started when I was setting up a 10-year fixed-term annuity before retirement. I had initially decided on a purchase amount and, to fund it, liquidated some of my developed world index tracker. I moved the cash into my Vanguard money market fund to keep the money safe prior to the annuity purchase.
After more research and some analysis, I decided to purchase a smaller annuity, leaving me with approximately $120,000 still sitting in my money market fund. Because of market behaviour this last while, I kept putting off reinvesting the money back into the original fund it came from.
I've looked at it nearly every other day for the last three months, and I couldn't pluck up the nerve to simply reinvest. It's absolutely ridiculous, and the annoying thing is I knew I was being pretty dumb and needed to get a grip, but man, was it hard!
I got a severe case of status quo bias with a large helping of loss aversion, all wrapped in a blanket of analysis paralysis, and I'm here to tell you it's as real as a brick wall and nearly as hard to knock down. I was literally mentally stuck and couldn't execute a simple financial transaction for three months—unbelievable.
I think this experience has really hit home that financial decision-making isn't purely rational, even with my strong business and financial background. Emotions, biases, and an irrational fear of making a "wrong" move overrode my logical understanding. I guess this is why personal finance is often called personal as much as finance.
I'm really annoyed with myself, but at least I've eventually taken the plunge back into the market. The next time I hear someone talking about behavioural finance, I'm actually going to hear them and internalise it as best I can.
I guess you have two options: chuckle at my self-inflicted misfortune, or perhaps take it on board and reflect on how a reasonably financially self-assured and experienced investor got blindsided by the psychology of money. I suggest the latter.
For my own sadness and everyone else's benefit, I just asked Google Gemini to tell me the opportunity cost over the last 90 days. $11,500– that's how much my indecision has cost. I'm now going to sit down in a dark room for a few hours. Have a good day.
The post A Personal Encounter with the Psychology of Money. appeared first on HumbleDollar.
