Jonathan Clements's Blog, page 134

Holder or Investor?

WE GET EXCITED WHEN our investments go up in price and disappointed when they fall. This is the logical “holder’s view” of a change in our immediate wealth. Some may feel the urge to buy more of the winners and sell any losers.

But there’s also an alternative way to view changing market prices: the “investor’s view.”

Consider that an investment’s price rise often indicates you’re taking a pay cut. Yes, you now have more money invested in that position, but you’ll likely get paid less per dollar of that new value. The reason: What we get paid in stock earnings or bond interest is unlikely to rise in sync with an investment’s price.

That’s undeniable with bonds: Interest and principal payments are fixed, so the math is clear. What about stocks? Earnings tend to be less volatile than stock prices, so it’s risky to assume earnings in the short term will grow commensurate with share prices.

If a holder’s view dominates your thinking, rising prices might tempt you to buy based on price momentum or FOMO—fear of missing out—with the hope of later selling at an even higher price to a “greater fool.” What about the investor’s view? The higher priced position may now be less attractive compared to alternative investments that haven’t gone up in price.

The situation reverses when prices fall. With a holder’s view, you might sell to avoid further loss. But taking the investor’s view, you see a pay raise, prompting you to buy.

The investor’s view can also help with portfolio allocation decisions. Consider two major investment risks: credit risk and interest rate risk. Credit risk is not getting paid what you expected to receive, while interest rate risk can devalue whatever you do get paid.

When balancing a diversified portfolio of stocks, with their credit risk, and investment-grade bonds, with their interest rate risk, it’s helpful to estimate the after-tax yield you expect from each at current prices. For bonds and bond funds, it’s easy to find the yield to maturity or SEC yield.

What about stocks? That’s not so easy, with stock market earnings subject to endless “expert” predictions. Yet, somehow, you should estimate the stock earnings yield you might receive in return for taking credit risk, so you can compare it to the yield available by taking on bond interest rate risk. To calculate the stock market’s earnings yield, you reverse the usual price-earnings ratio calculation—dividing share prices by earnings—and instead divide the earnings by the price.

There are many ways to estimate the S&P 500’s near-term earnings. You might look at trailing 12-month reported earnings, forward 12-month predictions, historical earnings adjusted for inflation or average historical earnings return on book value. You could pick one or a combination of these to calculate the current earnings yield.

Today’s stock and bond yields should then be adjusted for your expected marginal income tax rate for each type of investment. Now, you can assess the relative after-tax benefit of allocating your portfolio between the stock market’s credit risk and the bond market’s interest rate risk.

This is the investor’s view of portfolio allocation—one driven by relative yield—versus the holder’s view driven by price momentum. Which should you favor? I’d argue it’s best to consider both when investing. Why? You may want to split your bets. Add some money to a few positions you think might continue to go up, while placing most new money in positions with rising relative yields and a good chance to benefit from price reversals.

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Young at Heart

MY WIFE AND I TOOK a two-week trip to Ireland. We flew to Dublin and stayed at the Hotel Riu Plaza. If you’re ever on the run and need a hiding place, just ask for a room on floor 2C. They’ll never find you because of the strange floor plan. All things considered, the Riu Plaza is a fine hotel at a reasonable price, with a good buffet breakfast to start your day.

After touring Dublin for four days, we took a train to Galway for three days. It’s the largest city close to the Cliffs of Moher. Seeing those large sea cliffs, which reach a height of 702 feet, was one of the reasons we took the trip.

We decided to take a tour bus to the cliffs from Galway. Gary, our driver, greeted us, and asked where we’re from and whether we’re enjoying our stay. Then, in his Irish accent, he said, “I have two reserved seats for you, right behind me.” These seats gave us a great view of the countryside and the Burren as we made our way to the cliffs. The Burren is a limestone area known for its caves, rock formations and archeological sites. Rachel loves to take pictures. This was perfect.

But we didn’t request special seating. When we boarded the bus, it was nearly full. They must have saved these seats for us. But why? I think it’s because we’re elderly. Sitting in the other two reserved seats across from us were another older couple.

When we bought the tickets, we told them we’re over 65 to get the senior discount. If our age is the reason we got those seats, I wished they hadn’t done that. I don’t need any special treatment, especially getting on or off a bus. My wife and I were just as physically fit, if not more so, than others on the bus.

I don’t feel my age. In fact, I feel much younger than age 72. Sometimes, I have to pinch myself, because I can’t believe I’m this old. They say feeling younger than your age may be good for your health, and I believe that. That’s one reason I don’t plan on moving into a retirement community. It would make me feel older if I wasn’t regularly around younger folks.

On the way to the cliffs, we passed a small cemetery full of headstones. There were so many I couldn’t see how you could walk around the headstones without bumping into one. I told my wife that if I die while we’re traveling overseas, cremate me, put my ashes in an urn and take me home. She can spread my ashes anywhere but the ocean. I want a permanent place, like our backyard next to the rose bushes.

That cemetery made me think of my childhood friend, Jeremy, who passed away last year. He didn’t have a funeral. Instead, he requested his wife get all his friends together, and have one last dinner and drinks for him. He told her before he died that they could order all the food and drink they wanted, and to tell them it was on him.

While attending the dinner, I heard someone ask, “Who is paying for all this?” Another person said, “Jeremy, drink up.” I thought it was odd that a deceased person was picking up the tab. It just didn’t sound right. But that's the way Jeremy wanted it. He was a generous person, alive or dead.

There were quite a few people attending the dinner. They were all eating and drinking like there was no tomorrow. His wife told me she was afraid that the word would get out and people would show up uninvited. She was concerned that a lot of his ex-coworkers might turn up. I could see how this could easily spiral out of control.

When I left, they were still going at it. I can’t imagine how much his wife spent on this get-together. But what probably unnerved her the most was not knowing how much it was going to cost, because of the unlimited food and drink, along with folks showing up uninvited. It’s like owning stocks in a brutal bear market, and not knowing where share prices are going to bottom out. It’s the unknown that can rattle you, especially when it comes to your money and health.

When I received the invitation to the “celebration of the life of Jeremy,” I initially thought it was a great idea. Should I have my wife do something like this for me when I’m gone? I love my friends. But I’m not about to get my wife involved in something she has little control over. She’ll have enough financial stress after my death, without dealing with a “celebration of the life of Dennis.”

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.

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Old Money

COMMENTARY ABOUT America’s wealth inequality seems to be everywhere. According to Wikipedia, as of 2021’s fourth quarter, Federal Reserve data indicate that the top 1% of households hold 32.3% of the country’s wealth.

Meanwhile, Pew Research Center reports that the median wealth of the richest 20% of American families increased by an inflation-adjusted 45% between 1998 and 2007, while the median wealth of middle-income families rose just 16%.

And then there’s the Federal Reserve Bank of St. Louis, which reported that in 2019 a family needed a net worth of at least $1.22 million to be in the top 10% of wealthy families. These folks collectively owned 76% of household wealth. By contrast, a family needed at least $122,000 to land in the middle 40%, and this 40% of the population collectively owned 22% of U.S. wealth.

Some commentators argue that this skewed wealth distribution is partly the result of tax advantages that aren’t available to the less wealthy. For instance, accumulated wealth is often taxed not at income-tax rates, but rather at lower capital-gains rates. Others point to tech billionaires and complain about them owning a disproportionate share of the country’s wealth.

But there may also be a less politically divisive reason for America’s wealth concentration: longevity.

Richard McKenzie, a professor emeritus of economics at the University of California, Irvine, has written that advances in medicine and better health care have increased the lifespans of the elderly—a considerable financial advantage, since longer lives mean more time to save and invest. Today’s retirees are able to compound their investments for longer than prior generations.

The author offers an example: Consider a healthy 65-year-old retiree with a $1 million portfolio invested in an S&P 500-index fund. If our retiree can leave the portfolio untouched for 10 years and earn an average after-inflation return of 7.2% a year, the portfolio would double in value to $2 million—even if no new savings are added.

A $1 million portfolio would land you in the top 12% of wealth holders. A $2 million portfolio would land you in the top 6%. Result: The greater our wealth at 65, and the healthier and longer-lived we are, the more wealth we could potentially amass, pushing us into the top tiers of American wealth.

Critics of America’s skewed wealth distribution shouldn’t overlook the impact of those age 70 and older. These folks constitute 16% of the population—and they hold $35 trillion in wealth.

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Piling On the Pain

LOOK UP THE WORD “nit” in the dictionary and you’ll find a few definitions—none of them particularly positive. Perhaps, then, it’s no surprise that the tax commonly known as NIIT can be a bit of an annoyance.

NIIT is short for net investment income tax. It originated back in 2013 to help pay for the new health care law. The net investment income tax rate is relatively innocuous at 3.8%, and it’s already been on the books for 10 years, so why talk about it now? It’s worth reviewing because Congress employed a sleight of hand when it created the tax. As a result, over the years, it’s been creeping up on more taxpayers.

Specifically, unlike most other taxes, the NIIT isn’t indexed for inflation. When it was created, it applied to single filers with adjusted gross incomes over $200,000 and married couples with incomes above $250,000. But those thresholds haven’t increased since 2013. As a result, as wages have risen, this “little” 3.8% tax has started to apply to more and more people. The trend has accelerated recently as wage growth has picked up along with inflation.

What exactly is the NIIT? As its name suggests, it applies only to investment income. For most people, this means dividends, interest and capital gains on investment assets. But if you sell your home, the NIIT would also apply to any gain above the portion that’s normally excludable. In those cases, this little tax can end up translating into a sizable bill.

To be sure, the NIIT doesn’t apply to employment income or to Social Security. It also doesn’t apply to IRA distributions or to the taxable portion of Roth conversions. And it doesn’t apply to income that isn’t otherwise taxable, such as interest from tax-free municipal bonds. Finally, it doesn’t apply to income generated inside retirement accounts, such as IRAs and 401(k)s.

The challenge, though, is that the NIIT doesn’t stand on its own. It’s “stacked” on top of a taxpayer’s other income. As a result, folks might see their NIIT exposure increase even when their investment income doesn’t rise. To understand how that can happen, let’s look at an example.

Suppose Jane is single and has employment income of $180,000. Let’s also suppose she has investment income of $25,000. In this case, her total income would be $205,000, so the NIIT would apply to the $5,000 that exceeded the $200,000 threshold for single filers. The tax would then be $190, calculated as 3.8% x $5,000.

Now, let’s suppose Jane receives a raise the following year, to $200,000, while her investment income stays at the same $25,000. In this case, since all $25,000 of Jane’s investment income now sits above the $200,000 threshold, the entire amount would be subject to the 3.8% NIIT, for a tax of $950 (3.8% x $25,000). The NIIT, in other words, would rise five-fold just because Jane’s other income rose. That’s a key reason the NIIT is worth paying attention to.

Another reason the NIIT has started to hit more investors’ radar: For most of the past 15 years, interest rates have been extremely low. But with the steep increase in rates over the past year, many investors have seen their investment income rise. How can you tell if you’ve been hit by the NIIT? Look for Form 8960 in your tax return.

To some extent, the net investment income tax is a fact of life. And unlike ordinary income taxes, you can’t always reduce your NIIT exposure by increasing your deductions. That’s because the NIIT is based on adjusted gross income (AGI), not on taxable income. Those terms sound similar, but there’s a key distinction: AGI is your income before itemized deductions, so strategies like making charitable contributions can’t be used to bring down your NIIT bill. Still, there are other ways to moderate NIIT exposure.

First, consider increasing contributions to your retirement accounts. This is a so-called above-the-line deduction, meaning that it reduces adjusted gross income and thus can help with NIIT exposure.

On Schedule 1 of your tax return, you’ll find a grab bag of additional above-the-line deductions. They’re generally less common, but it’s worth reading through the list to see if one might apply.

If you have significant bond holdings in your taxable account, consider municipal bonds. In the past, most investors viewed municipals as close cousins of Treasury bonds on the risk spectrum. As we saw in 2020, however, when the pandemic ravaged many municipalities’ finances, municipal bonds definitely do carry more risk than Treasurys. That said, highly rated munis have a very strong track record. For that reason, you might consider moving a portion of your Treasury holdings over to municipals.

If you hold any actively managed funds in taxable accounts, they’re worth reviewing. As I described last year, active funds can generate unexpected and unpleasantly large tax liabilities. That’s because, when a fund’s manager chooses to change up the investments in his or her fund, every investor in the fund shares pro-rata in any gains generated by those trades. That’s true even though you have no control over—and, worse yet, no visibility into—the timing of those trades. Depending on the funds you hold, it may be worth paying some tax to sell them and swap into broadly diversified index mutual funds or exchange-traded index funds, which tend to issue less onerous distributions, if any.

If you have a margin loan, make sure you, or your accountant, has picked up this number. Margin loan interest reduces net investment income dollar for dollar.

And finally, to the extent possible, look for ways to control the timing of your income. For example, if you’re selling a home this year, you might look for ways to delay other income into next year. Or suppose you’re considering a Roth conversion. While this income isn’t itself subject to the NIIT, it does increase overall AGI and, as explained above, that can bump more of your investment income into NIIT territory. That’s a factor worth considering as you decide on both the size and the timing of conversions.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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What’s Your Story?

AS SOMEONE WHO HAS marched through life—and made money along the way—by putting one word in front of another, maybe it’s no great surprise that I’m a big fan of writing things down.

My challenge to you: Follow the example of the 30 HumbleDollar writers who contributed essays to the book My Money Journey, and devote a few thousand words to detailing your financial journey, including your mistakes, triumphs and the lessons you learned along the way.

For some, the writing will come easily, while for others it’ll be a daunting exercise. But either way, I think it’s worth the effort—because it can help us answer three crucial questions.

What helped and what hurt our financial progress? Our recollections fade over time and our memories are often unreliable, so answering this question may be harder than it seems. Still, I believe it's instructive to look back and think about who and what influenced our financial journey.

We’re talking about factors such as our parents, mentors, luck, health, hard work, skill and thrift. And there are, of course, times when the absence of such things likely set us back. Perhaps we suffered ill-health, or we got unlucky in our choice of employer, or we discovered we didn’t really know what we’re doing.

My hunch: Those who have enjoyed a reasonable degree of financial success will find that the key contributors to their wealth weren’t big career breaks or a fabulous investment or two, but rather the prosaic business of collecting an income over three or four decades without too much interruption, and then regularly socking away a healthy chunk of that income.

What do we value? An honest assessment of our financial life won’t just offer pointers on what we should or shouldn’t do in the years ahead. It’ll also tell us about what we value, and that can help us to be wiser in our future spending and investing.

As we look back on our financial journey, have we been mostly concerned with building wealth or avoiding poverty? When we look at how we use our money—what we spend our dollars on, how much we save, and how much we give away and to whom—what does it say about what we consider important?

What do we want future generations to know about our life? There is—for better or worse—almost no aspect of our life that doesn't somehow involve money. That means that, when we write about our financial journey, we inevitably write about our life's journey.

What would you like your children, nieces, nephews and later generations to know about your time on this earth? What can you tell them that might be useful for their financial journey?

Our only immortality in this world will be the memory of others. I know a fair amount about my grandparents, but very little about my great-grandparents. Their stories, alas, are now largely lost. Would I like to read their words describing their financial—and life—journey? You bet.

A suggestion: As a first step toward writing about your financial journey, consider drafting your own obituary. That’ll help you lay out the basic facts of your life, and it’ll be useful to your heirs after your death. Stash your obituary with your estate-planning documents, and be sure to specify where you’d like it to appear. What if you decide to take the next step, and write a longer essay describing your financial and life journey? Include a printout with your other important papers.

If you’re happy with the essay and would like to see it appear on HumbleDollar, also consider emailing a copy to me at jonathan@jonathanclements.com. I’m not making any promises. But if I think your essay is worthy of publication—meaning it’s well-written, honest rather than self-congratulatory, entertaining and potentially helpful to others—I’ll let you know. Before you hit send, be sure to review the site’s guidelines for contributors, including HumbleDollar’s style guide.

This, incidentally, was also an offer I made to readers of My Money Journey. Since the book's appearance, the site has published three essays from readers—Mike Finley's Free to Give, T.V. Narayanan's Come a Long Way and E. Smith Smallwood's My Savings Journey.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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Picking My Pension

MY COMPANY SHIFTED in the early 2000s from a traditional defined benefit pension plan, with a formula based on salary and years of service, to a cash-balance pension plan. All new employees would be put in the cash-balance plan. Existing employees had a choice to stay in the traditional plan or move to the new plan.

A generous transition credit for the cash-balance option was offered to current employees. The transition credit was based on a combination of current salary, years of service and age. Most employees who were in their 40s, which I was at the time, elected the cash-balance plan, which gave them instant ownership of a reasonably significant sum.

The cash-balance plan’s advantages over the traditional plan included its portability—you could take the money with you if you left the company—and its greater cash value for those early in their career, because you were 100% vested in your current balance. By contrast, the traditional plan was worth very little until you hit the magic age of 50. Starting at 50, there was a rapid, step-change increase in the monthly benefit. What if you left the company before 50? You got peanuts.

By contrast, there was no age-based step change with the cash-balance plan. The value grew steadily based on a combination of benefit credits, which were a percentage of an employee’s earnings, and investment credits, which were based on multiplying the existing balance by a percentage derived from a combination of the S&P 500’s total return for the year and a bond index. In no case would the annual investment credit be less than 4%. This protected employees during years when the S&P 500 had a negative return.

The election made in 2001 was irrevocable. Subsequently, the formula used for calculating the cash-balance investment credit changed twice. In 2008, the S&P 500 component was removed, which reduced the upside potential. Money accumulated prior to 2008 could still grow according to the original, more generous formula, but all benefit credits made in subsequent years could only grow according to a selected bond parameter.

Then, starting in 2017, the bond parameter was applied to the entire balance, completely eliminating any S&P 500-based growth potential. It was explained that these changes weren’t due to decisions made by the company, but were required based on recent legislation. To somewhat mitigate the impact, the benefit credit percentage was increased a little.

One of the results of these changes is that the few folks around my age who stayed with the traditional pension plan have ended up much better off in terms of pension income. True, they can’t take their pension as a lump sum—my employer doesn’t offer that option—but their monthly payouts are significantly higher than those of a similarly paid and tenured employee who elects to annuitize their accumulated cash balance upon retirement.

The annuity option for the cash-balance plan is based on a specific IRS rate that’s published monthly. For my company, the rate in August of a given year will be used for all cash-balance plan annuities taken in the following year. Say you have a $500,000 balance in the plan. If the applicable August rate is 5% when you retire, you get $25,000 a year for life. If that rate is 7%, you’ll get $35,000. If rates are going down rapidly, you could actually end up with a lower monthly payout as a “reward” for working an extra year. To be sure, the cash-balance lump sum value would still have increased and you always have the option of taking that full balance as a single sum rather than as monthly payouts.

Here's where it gets personal. In a few months, I’m scheduled to retire and must make a pension decision. For many years, due to low interest rates, the monthly payout option wasn’t attractive. That changed in January 2023, when the effective annuitization rates jumped from around 6% to just under 7.5%. Whereas a $500,000 pension would have paid out around $30,000 annually if started in December 2022, that same pension would pay out around $37,500 a year if started in January 2023, an increase of 25%.

Last year, many workers with traditional pension plans scrambled to retire before the end of the year, so they could get a larger lump sum from their employer before the effect of higher interest rates kicked in. For traditional plans, rising interest rates reduce the actuarial present value of a traditional pension’s fixed monthly payout, making it less attractive to take the lump sum. By contrast, for cash-balance pension holders, higher interest rates don’t reduce the lump sum they receive. Still, as with beneficiaries of a traditional pension plan, higher rates do mean it makes sense to revisit the merits of taking the monthly payout.

For now, I’ve decided to punt. I’m deferring my pension until January 2024. The applicable interest rate has been trending higher, and I’ll know by September 2023 whether the rate applied throughout 2024 will be higher than the rate currently in force for 2023. Currently, I calculate the breakeven period for forgoing four months of pension payouts at the end of 2023 to be around six years. If, for some reason, the interest rate dives in the next couple of months, I can still elect to start my payments before the end of 2023.

Have any other HumbleDollar readers had to make similar decisions on a cash-balance pension? I’d love to read your thoughts.

Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs. His previous articles were Planting Bad Seeds and No Interest.

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Any Seat Will Do

WHEN OUR CHILDREN were little, we had season tickets to the Children’s Theatre in Minneapolis. We started taking our older child, and then brought his brother along when he was old enough to enjoy the show. We had tickets in the front row of the balcony.

Before my youngest son’s first show, he looked over the balcony railing at all of the people below. He asked why we were clear up here, when there were all of those people below us. My oldest son told him in a conspiratorial whisper that it was “because Mom and Dad are cheap.”

I reminded them that, while we may be cheap, they were here at the show. In my defense, I believe that, in many venues, the first row of the balcony is one of the better seats in the house.

For several years, we held season tickets to the St. Paul Chamber Orchestra. Our seats were in the second balcony. But as I’ve gotten older and our finances have become more secure, I find that my ticket purchasing has become a bit less thrifty.

For instance, a friend is coming to town and we’re going to a Twins game. We’re sitting in the seventh row behind home plate. Similarly, when Manhattan Transfer was doing one of its last concerts, the venue was the Dakota, an intimate jazz club. My wife and I secured a booth right in front of the stage. Meanwhile, we took my mother to the touring production of Hello Dolly. We were in the first row of the main floor. My mother’s smile while watching the show made the price of the tickets immaterial.

I still can’t bring myself to pay for tickets on the 50-yard line when Purdue, my alma mater, comes to town. But I’m closer to the 40-yard line than the end zone, which is where I watched the games when I was younger.

I justify all of this by citing the research that says we’re happier when we spend money on experiences rather than things. Still, I’m not 100% sure that you get more happiness by sitting in the front row rather than the cheap seats.

For many years, my father-in-law had season tickets to the University of Minnesota’s Gophers basketball games. He would take me to the game when the Gophers played Purdue. His tickets were literally the very last row of the highest section, behind the basket. I have wonderful memories of those games.

I’m not sure we could have enjoyed the games any more than we did—which means that perhaps I’m wasting money buying more expensive seats. What I do know for sure: It would be a shame to miss building those memories with the people you love and care about—and you should go even if you can’t afford the best seats.

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Own Worst Enemy

IF YOU'RE LIKE ME, you’re always tempted to do something with your portfolio.

How should I invest if inflation stays high? What if interest rates come down? Am I well-positioned for that? Do bonds offer a better risk-reward than stocks right now and, if so, should I adjust my long-held stock-bond mix?

There’s been recent research and commentary, including two pieces from HumbleDollar’s Adam Grossman that you can find here and here, about how doing less is usually better and how to recognize when making a change makes sense.

But why is standing pat usually better than acting on our latest ideas? Among other things, we can get thrown off track by fear, greed and the news. Sometimes, that fear is the fear of losing money. Sometimes, it’s fear of missing out on a big market rally. I’m feeling that these days, with all the rage over tech stocks because of AI, or artificial intelligence.

Here’s an obvious example of fear at work: selling when the stock market is down big. At such times, the headlines will be scary and the prophets of doom will seem prescient. You have no way of knowing whether the market will keep falling. In the short term, it’s a coin toss. The stock market certainly can and likely will fall 30%-plus multiple times during your investment career.

But it’s a bad decision to sell. How do I know? Because the odds are overwhelming that you’re reacting to fear and that you’ll miss the rebound. If that happens, you’ve lost an opportunity to make money that can’t be recovered. That happens to many investors over and over.

Similarly, in many other situations, the urge to act should also be resisted. The fact is, the information environment is stacked against you. Truly insightful journalism—especially that which provides good and actionable information for investors—is more difficult to produce than you might imagine, especially on a daily or weekly deadline.

Journalists need someone to quote. Folks with an ax to grind or an expensive fund to promote are always available and usually quite articulate. Their bloviating makes for good copy but often bad advice.

In most circumstances, the right action is to buy and hold low-cost funds. Yet few in the Wall Street ecosystem will get rich off that advice. The media don’t want to say or print it every day, and people don’t want to hear or read it every day.

Think of the difference between gaining knowledge from a classic investment book and getting caught up in the hyperventilation that often characterizes our daily discourse. Think Stocks for the Long Run versus “How to Inflation-Proof Your Portfolio” or “Five Stocks to Cash in on AI—and Five to Dump.”

I’m not immune. I monitor my portfolio closely. Too closely. I get an itch when I’m caught wrong-footed. With my value bias and international diversification, I’m lagging this year as U.S. mega-cap tech stocks take off again. For me, that causes a lot of anxiety and insecurity. At age 61, I can’t afford another long stretch of paltry returns for foreign and value stocks.

When I’m tempted to trade, it’s almost always in response to headlines or to fear. It’s me kicking myself for missing out on something. It’s me trying to outsmart the market. I try to bottom fish—but often end up catching a falling knife instead—or I fall prey to performance chasing. I’ve invested on margin, meaning I’ve borrowed against my stocks to buy more stocks in an effort to make bigger bucks, with predictably disastrous results. I’ve made almost every mistake in the book. I have met the enemy of my financial future: It is me.

As I wrote in 2019, simply contributing modest amounts regularly to the first two diversified funds I bought in the 1980s would have made me a millionaire today. The two funds were rarely lionized in the press. They were low-cost, actively managed Vanguard Group funds that, in the go-go 1990s, bored me to tears. Now, remembering how I gave up on them practically brings me to tears.

The information environment is even stacked against the experts, despite the billions they spend trying to get a performance edge. They’re subject to the same psychological forces as amateurs, and the company research and technical analysis they use have been shown not to provide a bankable advantage.

Moreover, you have an edge over most money managers: You can play for the truly long haul. It’s okay to lag in one market environment or another. My old Vanguard Windsor II and Vanguard STAR funds certainly did, but they still delivered wealth-building returns over the decades. No one is looking over your shoulder daily, quarterly or annually. That gives you the freedom to do nothing, nothing at all.

William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.

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Leave It at Home

MY WALLET WAS STOLEN many years ago when I was traveling on business. I had gotten onto a crowded elevator at my hotel. The last person to get on was a woman who pretended to get her heel caught in the elevator door.

The thieves were a young couple—and they were real pros. While we were focused on her, her partner proceeded to open the flap of my handbag and help himself to my wallet. Who knows how many others he took before they both decided to get off the elevator?

Even though I thought I’d taken great care to randomly jot down pin numbers and passwords on a cheat sheet, they had no problem deciphering how to use them. In a matter of minutes, they had charged $3,000 on a couple of my credit cards.

I was thinking about that incident after reading an article about downsizing your wallet. Some of the items we carry around could be a treasure trove for thieves.

Here are some things that should come out: extra cash beyond what you would need for an emergency, your health insurance card, credit cards rarely used or only used for online purchases, blank checks (who uses checks anymore, anyway?), receipts, store rewards cards, photos, library card and, yes, cheat sheets with pin numbers and passwords.

Why the library card? Thieves can run up fines on a stolen card, affecting your credit score. What if you have a medical emergency and need your insurance card? What if you’re out and about, and suddenly realize you need to go to the grocery store and want your rewards card? Due to a lack of space in my wallet, I used to keep a separate thin wallet with my driver’s license, insurance information and other items. That second wallet wasn’t stolen by the elevator thieves. Today, we can keep some of this information on our phones.

What does that leave? You might carry a small amount of cash for emergencies, such as for a cab that doesn’t take credit cards. If you’re traveling, you might also want extra cash to tip the bellboy or the porter. In addition, you’ll want the credit and debit cards that you’ll need that day.

While you’re at it, make a photocopy or take a photograph of the front and back of your credit and debit cards, as well as your driver’s license and your passport. If you lost any of these, that information could be invaluable.

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An Educated Choice

WHEN I WAS YOUNG and unschooled about money, I borrowed thousands of dollars to attend Northwestern University. As I recall, tuition was around $12,000 a year in 1980, and I had only $3,000 to my name. How could I pay?

The dean sent me a letter explaining that the college would lend me the money for my master’s degree in journalism. It would also extend me a work-study job, which would help pay for my spartan off-campus room.

I jumped at the offer and started the four-semester program. Each term, I would walk across campus to sign my name on a couple of long loan sheets. Did I understand what I was doing? Vaguely. What I mostly comprehended was that an exciting year at university seemed practically free to me.

Fortunately, after graduation, I could afford to repay my loans on the paltry income I earned as a cub newspaper reporter. Unwittingly, I had obeyed this rule of thumb: Don’t borrow more than you’ll earn in one year in your chosen field. In my case, I borrowed around $9,000 and earned $13,000 in my first year at The Bradenton Herald.

The great thing about college loans is also the worst thing about them: You don’t have to be financially qualified to borrow money. The federal government guaranteed repayment of my loans, so no attempt was made to determine if I was financially qualified to repay the sum involved.

Please let’s avoid a political discussion about college debt forgiveness, pro or con. What I want to focus on here is what an attractive trap the guaranteed student loan has become, especially as college costs have escalated. It’s easier to borrow more than you can afford, and there are too few adults warnings kids about this easy money.

It may fall upon parents to ask if their children are getting over their heads in debt. I’d start with the rule of thumb I just mentioned: Don’t borrow more for college than you could earn from one year’s work in your future career. It’s an arbitrary standard that contains a kernel of truth: cost and value should balance.

One obstacle to following the rule is obtaining the necessary cost and income data. College costs are opaque. Recently, I looked up how much students borrowed and subsequently earned, on average, at hundreds of colleges using a calculator published by The Wall Street Journal. The Journal’s information is hidden behind a paywall, but you might get free access at your local library. The Journal breaks down data collected by the Department of Education by college, degree and major. Can’t get access to the Journal’s calculator? You might instead look at the Department of Education’s College Scorecard.

From my research, many majors at many colleges appear to easily pass the test. Students in accounting, biotechnology, business, computer science and engineering all borrow less than they typically earn in their subsequent careers, no matter which school they attend.

The Journal’s research highlighted a darker trend: Master’s programs at some prestigious universities can land their students in far more debt than they can afford. For instance, students who earned a master’s degree in social work at the University of Southern California typically borrowed $112,000 for jobs that paid $52,078.

Why not pursue the same degree at a place like Bryn Mawr College, a highly regarded women’s college outside Philadelphia, where the median student borrowed $45,250 and later earned $48,579 a year? Bryn Mawr’s social work master’s program is coed. Findings like this suggest that students can follow their passions without sinking into debt—if they’re wise about which school they attend.

Here’s a second example: Students who earned a master’s degree in journalism at Northwestern University had a median debt load of $54,936 in 2015-16, and median pay of $41,565 two years later. Because their debt was higher than their subsequent annual income, my old school doesn’t pass the rule of thumb.

But some 400 miles away, at the University of Missouri at Columbia, the median journalism grad student borrowed $21,000 and earned $50,543 two years later. Missouri passed the debt-to-income test handily. I’ve taken courses at Missouri and Northwestern, and found both excellent. All else being equal, Missouri would be the better school for a student to attend.

You’ll notice I chose lower-paying fields—journalism and social work—for my examples. Students don’t have to give up on the liberal arts if that’s what excites them. But they do need to be choosy about which college they attend. Some well-known schools cost too much, while many other well-regarded schools outside of big cities are far more affordable.

Are there downsides to this approach? Yes, several. First, it embraces the notion that borrowing for college is normal, as long as you don’t go too deeply into debt. Arguably, the right amount to borrow is zero, if possible.

Second, students may not know their major when they enroll in college. It’s also routine to start with one major and wind up with another. Still, if you’re a parent, talking through the debt-to-earnings ratio with your teenager might spark a worthwhile discussion about the economic prospects of different schools and majors.

Third, this rule of thumb seems not to work for some high-paying professions, like dentistry and medicine. Doctors’ early earnings are dwarfed by the size of the debt they take on, yet they may do fine over a long career. On the other hand, some medical graduates do find themselves squeezed by debt, even though they enjoy strong six-figure incomes.

Finally, this data-driven approach does take the romance out of a traditional method of college selection—falling in love. A tree-lined quadrangle might be a trap for the unwary student if the school is too expensive. My advice: Run debt-to-income comparisons before scheduling visits so your child doesn’t fall in love with the name-brand college that costs more than the child can reasonably afford.

Do parents have an obligation to pay part or all of their children's college costs? Offer your thoughts in HumbleDollar’s Voices section.

Greg Spears is HumbleDollar's deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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