Jonathan Clements's Blog, page 147

The Great Imposter

I'VE BEEN AN IMPOSTER all my life. In high school, I drove my silver Corvette Stingray into the teachers’ parking lot, revving the engine to announce my arrival. But once I came out from under my shades and joined the throng of students converging on the entrance, I reverted to the shy introvert walking tentatively with his head down.

From time to time, we all take on the role of great pretender to hide our fears of failure and humiliation, and to get ahead in a competitive world. Remember your first date? Were you the boy jaunting up to her front door with knees buckling to meet her parents? Were you the girl in front of the mirror perfecting her make-up? Or how about the newbie realtor driving the Mercedes he can’t afford to impress clients?

My posturing didn’t stop with high school. Terrified at the prospect of losing control, I avoided pot parties in college and took up pipe smoking. I had to be “on” even before I entered graduate school. At my admissions interview, I was told my excellent grades showed a love of learning. I nodded knowingly, remembering those all-nighters cramming for finals, with Motown music playing in the background, to compensate for my poor attendance.

Journalism was my original college major. For my honors thesis, I proposed to study the Black Sox scandal, when eight members of the Chicago White Sox were accused of throwing the 1919 World Series. Prof. Grey, a bespectacled, stubby man in a crisp white shirt, striped blue tie and burgundy vest, responded that baseball didn’t meet his standards for academic significance. I turned and left his office, feeling diminished and a little bewildered. Two days later, I made an appointment with the dean to change my major to psychology.

I approached my first academic job with innocence and fervor. I was committed to a 60 Minutes-style investigation of the good-old-boys publishing charade. I mailed mock research reports to psychologists from two divisions of the American Psychological Association, each with divergent social values. I found the reviewers were partial to studies that supported their own social convictions.

The resulting study was accepted for publication in the American Psychologist, the profession’s flagship journal. Then, a month later, I received a letter from the editor revoking the decision. No reason for the withdrawal was given other than a vague reference to the journal’s responsibility to uphold the traditions of the field.

Clearly, a higher-up was more concerned with preserving the fiction of a value-free peer review process than with making room for the inevitable role of psychologists’ social beliefs in their evaluations of research. I lost my faith in psychological science and spent my remaining 10 years in academia primarily climbing the ladder to tenure. Once again, I was the great imposter.

Just as enthusiasm for my job as director of psychiatric research was waning, I picked up a new book by Sheldon Jacobs, an early advocate of no-load mutual fund investing. He encouraged purchasing fund shares directly from management companies to circumvent the standard 8.5% front-end sales commission. Having owned funds for several years, I had already learned the two gospels of long-term investing, time in the market and the compounding of gains. Attention to commission-free and low-expense investing produced even more outsized returns. The good news: The index fund revolution has lessened the need for such vigilance.

As a psychologist, many years of tending to people’s struggles and shadows takes its toll. With retirement beckoning, I began to wind down my practice. By chance, checking my portfolio one day, I saw that Charles Schwab was looking to expand its independent advisor network. Driven by my longtime interest in the financial markets and especially fund investing, I opened an investment advisory service six months later. I felt blessed to have an opportunity to live out a passion, a chance many folks never get.

But no job is a free lunch. For all their faults and sins, brokerage houses can match representatives to their specialty. Danny deals with options and Gail covers retirement issues. But many small independent advisors try to run an omnibus shop, offering all solutions to all clients. Because our expertise and interests are as individualized as our training and personalities, we are often imposters.

I’m well-versed in mutual funds and exchange-traded funds, but I was woefully unprepared to navigate clients through the maze of fixed annuities, variable annuities and whole-life insurance. I closed my business after a couple of years, recognizing that diversification across the universe of financial options takes precedence over a narrow focus on fund investing.

We have all suffered a Prof. Grey who blocked or marginalized our career paths. Fifty-five years ago, I encountered a supercilious and arrogant man. As an impressionable and sensitive boy just emerging from adolescence, I abandoned a field I had envisioned as a career while sports editor of the Hewlett High School newspaper.

Since mid-2022, I have contributed more than 20 articles to HumbleDollar. Writing about personal finance, with an emphasis on consumer advocacy, has been enlightening and at times emotional. Psychology as a profession has been gratifying and, all things considered, has been good to me. But here now, finishing up this article, I no longer feel like an imposter.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

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Passing It On

I KNOW I'M NOT WISE. Still, I’ve picked up enough wisdom to realize I didn’t have much of it when I was younger. At the very least, 60 years of stubbed toes, slips and falls have shown me that some paths shouldn’t be trod, while a few are worth traveling.

I try to refrain from offering unsolicited advice. But I’ve lately had a growing desire to steer young adults toward choices that escaped my notice when I was their age—with a focus on three areas:

Think about who came before us. As young adults, we frequently encounter situations that are new to us, but perhaps not to old timers. For instance, on the first day at a new job, or maybe as a new member at a place of worship, notice that you’re stepping into a structure that’s already in place. The old guys and gals may be doing a lot wrong, but they must also be doing something right. Asking for advice before offering it can ease acceptance of a brilliant idea, and may even help refine and improve it. I still cringe at the memory of situations when I failed to recognize my cluelessness.

In the investment world, a plunging 401(k) can be unnerving for a first-timer. At such a moment, encouraging words from someone who’s seen a downturn or two can ease a young investor’s jitters. Meanwhile, in a buoyant market, young investors may be blind to risks that often go unnoticed by the uninitiated.

It’s also good to remember that we can be a newbie, even when we’re old. Every year, I sail into unfamiliar waters, but that doesn’t mean they’re uncharted. Chances are, someone has tackled the task before or faced the same financial decision. If I’m smart enough to recognize my ignorance, the advice I need may be there for the asking.

Think about who comes after us. During my middle years, I often focused only on meeting my own goals and responsibilities, with little thought beyond myself. I strove to keep up with the demands placed on my brain and my time by work, family and others. I must admit, it often seemed easier and more efficient to do a job myself, rather than teach another how it’s done. I may have also lacked the ability, and perhaps the humility, to relinquish control to someone else.

In recent years, I’ve realized such thinking is short-sighted. I’ve begun to reflect on the responsibility I had to the brand new members of my circle, and how in the past I might have failed them. To make amends, I’ve begun reaching back not only to those just starting out, but also to colleagues just a few steps farther from the finish line than I am. Part of my exit plan is to help these busy people in their own middle years avoid my mistake—and recognize the value of training those who are younger.

For example, at work, there are myriad ways that seasoned physical therapists can nurture younger ones. One important way is through clinical education, which is essential to turning out new rehab professionals. Each licensed therapist learned the ropes from an experienced therapist. I willingly devote extra time organizing our clinical education and encouraging our physical, occupational and speech therapists to give back to their profession.

In my own life, the experience of caring for older relatives has taught my wife and me that eventually we’ll probably need to rely on someone who has intimate knowledge of nearly every aspect of our lives. That person is most likely our daughter. With that in mind, in addition to the training and parental support appropriate for a teen on the cusp of young adulthood, we sneak in topics that cover the broad continuum of her life and ours. We have begun sharing details of our finances and our plans for the future.

I also encourage strangers to foster newcomers. Last year, when a friendly, young phlebotomist gave me much appreciated painless service, I called her supervisor to suggest she recognize the worker for her superior performance. About the same time, before a medical procedure, a timid, young nurse failed in her attempts to start my IV. An older nurse took over and quickly found the vein, but also found time to needle the novice about her inexperience. Before she left, I complimented the expert, but also suggested she give the young nurse some pointers.

Think about what lies ahead. When I was young, time seemed such a cheap commodity. I thought I had years before I needed to start on the nitty-gritty of a financial plan. I also wondered who could possibly know what to plan for. I now realize I was wrong on both counts.

Back then, even though I didn’t know it, I was in desperate need of good advice. If I live long enough, I’ll outlive my ability to earn money, but not the need or desire to buy the necessities and niceties of life. To accumulate enough funds, decades of diligent saving and investing are required. Even unknown events, like an early death or disabling injury, should be prepared for with life and disability insurance.

Ed Marsh is a physical therapist who lives and works in a small community near Atlanta. He likes to spend time with his church, with his family and in his garden thinking about retirement. His favorite question to ask a young person is, "Are you saving for retirement?" Check out Ed's earlier articles.

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A Moving Predicament

EVERY TIME I HEAR the sage advice to pay off a mortgage before retirement, I wince. Not only will I have a mortgage in retirement, but also I won’t even make my first payment until after I retire—just as my salary plummets to zero.

I hate going against the conventional wisdom. But I really have no choice. As an active duty military officer who, for the past 20-plus years, has had to move every few years, it’s been difficult to build home equity. The upshot: Our family of seven will be starting from scratch—at least in the housing department—when I retire in a few years at age 51.

Back when I was in dental school and periodontics residency, my wife worked fulltime at a bioenvironmental firm in San Antonio earning $32,000 a year. That was just enough for us to buy a starter home in 2002 for $94,000. We sold it four years later for $120,000 and thought we’d struck gold. At my first military assignment in Colorado Springs, Colorado, we purchased home No. 2 in 2006 for $140,000, giving no thought to the fact that we’d likely be moving again just a few years later.

I hadn’t yet heard the recommendation to avoid buying a home unless you can see staying put for at least five-to-seven years, and preferably longer. Our departure from Colorado in 2008, during the housing market crash, meant bringing money to the closing when we sold our home. As a junior Air Force officer, the $25,000 check I had to write was devastating. Although my wife and I could have hung on to the house and rented it out, the idea of becoming long-distance landlords wasn’t an attractive one.

We assumed we couldn’t possibly be unlucky twice in a row, so we purchased our third home in 2009 for $225,000 at my next Air Force job in Texas. But four years later, I was again writing a check at closing—this time for $12,000—because we were selling for less than we’d bought. On my relatively low salary as a military periodontist, twice shelling out that kind of money was unwelcome and stressful, especially when combined with our student loans, two car payments and variable universal life insurance premiums—all rookie mistakes and stories for another day.

Those expenses, in turn, caused us unwisely to delay investing in the federal government’s Thrift Savings Plan and in our IRAs.  I swore I’d never buy a home again until I was out of the Air Force. We’ve stuck with that plan, for better or worse.

When I received orders for my next assignment in Albuquerque, there weren’t many suitable homes available for rent, so I wrote letters to the owners of homes I admired on Realtor.com, stating that—although I couldn’t afford to buy their home—I’d be glad to rent it for two years. A number of folks wrote back, enthusiastic to take me up on my offer, so we rented in New Mexico for two years. That was followed by another home rental for one year in Montgomery, Alabama.

Next, we had the pleasure of moving to Italy, where we rented for one short year in Aviano, not too far from Venice, before I received orders to head to South Korea, where we lived in a home on Osan Air Base. Now, we’re finishing a four-year lease on a home in the Washington, D.C., area, and preparing to move back to San Antonio. There, we plan once again to rent for four years, before I’ll pull the plug and retire after 24 years of active duty.

If you’re doing the math, the numbers are:  nine homes (three owned, six rented), three continents, two foreign countries and… home equity of exactly zero dollars. Perhaps unsurprisingly, this is not unique for those of us who move every few years, although I’ve known many military colleagues who have taken the opposite approach. Not only do they purchase a home at every new location, but also they keep each one and maintain an inventory of real estate as long-distance landlords. They’re probably smarter and more financially savvy than I am for doing it that way. There’s a part of me that’s a bit jealous and regretful that I never followed that strategy, but I just don’t have the stomach for it.

To make up for our lack of home equity, my wife and I have taken the approach of living far below our means—a difficult task in a family like ours with five children—and pouring roughly 40% to 50% of my income into our investments. We have a fairly simple three index-fund portfolio, with a total U.S. stock market fund, a total international stock fund and a total U.S. bond market fund. We also have 529 college-savings plans, which are similarly invested.

Between our investments, my military pension and our eventual Social Security benefits, we should have enough to pay for the kids’ college and our other expenses. The Post-9/11 G.I. Bill and Texas’s Hazlewood Act will cover two kids’ college, plus my oldest received a full-ride scholarship. That means our 529s will only need to cover two of our five kids.

While my projections suggest we’ll be on solid financial ground when I retire, there remains that frustrating future expense—our looming home purchase. Sure, we could be lifelong renters. But like most Americans, we dream of finally owning a home that’s truly ours for the long term. Even the three homes we’ve owned never quite felt like our own because we always knew we’d be moving soon, so we never took the time to update, remodel or make them uniquely ours.

By the time I retire, we’ll have about $100,000 set aside for a house down payment, although part of me is enamored with the idea of paying for the home in its entirety, despite the huge tax bill that a large withdrawal from our taxable brokerage account would trigger. Will we go that route? It's something I need to look into.

When does it make sense to buy a home? Offer your thoughts in HumbleDollar’s Voices section.

Casey Campbell is an active duty military periodontist and a homeschooling father of five. He and his family currently live in Northern Virginia. The views expressed in this article are those of the author and shouldn’t be construed as official or as reflecting the views of the U.S. Air Force or Department of Defense.

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A Better Plan

MY HUSBAND AND I WERE late bloomers when it came to estate planning. Though we took care of the basics when we became parents, such as purchasing term life insurance and naming a guardian, we never had a professionally executed will and trust until 2016, when we were in our late 50s.

Observing my in-laws, now in their 80s, made us realize how important it was to get our own estate-planning house in order. My husband, who is an attorney, has been named as the beneficiary and trustee of their estate. Understanding my in-laws’ financial lives, so we’re prepared when the time comes, hasn’t been easy—and there may be a bumpy road ahead. At the same time, there are complex issues to consider with our own adult daughter and the inheritance she would receive.

Although we’d drawn up a will and living trust in 2016, we had never transferred any assets into the trust. We wanted to remedy that, build in some guardrails for our daughter’s inheritance and name a different trustee. But there was a problem. When I emailed the local attorney who’d helped us draw up our estate plan, the email bounced back. I called his office and left a message, but no one ever returned the call. Our estate attorney had ghosted us.

Caught in the middle of the “sandwich”—wanting our estate to be easier to manage than what we’d observed in the older generations of our family, but also wanting to wisely provide for the younger generation—we decided to start over. It was an expensive process, but we’re far more satisfied with the results. Here’s what we learned.

We needed a better attorney. We discovered after the fact that the guy we’d hired in 2016 wasn’t actually an expert in estate planning. He was a divorce attorney who did a little estate work on the side. To find a more qualified attorney, we sent an email to our condo community’s group list. Four neighbors quickly replied with the name of the same local estate-planning attorney. We had a winner. A few weeks later, we had our first appointment with her.

You get what you pay for. Before our first appointment, our new attorney sent us a detailed online intake form which pulled together our basic details, contact information for family members, assets and so on. At the first meeting, she explained that we’d meet at least four times. Each meeting would have a purpose. First, we’d talk about our goals and parameters. Second, we’d discuss the outline of what she had come up with. Third, we’d sign final documents, review everything in detail and receive a to-do list. Finally, she’d follow up and make sure we had correctly transferred assets into our trust.

Our previous attorney had basically left us with “here are your documents, and good luck figuring out what to do next.” The price tag for this recent do-over was nearly double what we paid the divorce lawyer who ghosted us, but the value was excellent.

Expertise matters. One of our most important goals in our recent process, beyond just getting our act together, was to ensure that our 20-something daughter could manage her inheritance if something were to happen to both of us. Our new attorney came up with a plan: After we’re both deceased, the assets in our living trust would pass into a trust she also created in our daughter’s name. This trust has various guardrails to make sure the money is well managed and distributed over a period of decades. For example, if our daughter later marries and then gets divorced, her trust will remain her separate property.

In the years between setting up our first trust in 2016 and now, I’d read various articles about what you should or shouldn’t put into a trust, and they had just confused me. If we both died today, the bulk of our estate would consist of life insurance payouts and retirement accounts, and we had named each other as primary beneficiaries and our daughter as the secondary or contingent beneficiary. We did not, however, really want our daughter to receive that much of a windfall at this point in her life.

Our attorney explained that we could change the beneficiaries for both our life insurance and our retirement accounts to either our trust or our daughter’s trust. This was on our to-do list after our third meeting, and it was cumbersome to do. But we now know that, if we both suddenly pass away, the mechanism has been created to meet our goals and, more important, the assets are under the trust umbrella.

Naming a trustee. Because aspects of our estate may be contentious, we decided it would be better if an objective third party was our “successor trustee,” meaning the person or entity who takes over once we’re both gone. We also felt that we didn’t want to put that burden on a family member. Instead, we arranged for a local financial services fiduciary to serve as both the executor and trustee of our estate. They charged a $200 set-up fee and, when the time comes, the trust will be billed hourly for the services needed.

Setting up this third-party oversight was the final piece that made us feel comfortable that our daughter’s inheritance would be well managed. The trustee will distribute assets according to the schedule we created and manage things like inherited IRA withdrawals so that there’s no trouble with the IRS. We gave the names and contact information of both our new attorney and the trustee firm to two family members and to our daughter. That’s all they need for now.

What obligations do we have to our heirs? Offer your thoughts in HumbleDollar’s Voices section.

Dana Ferris and her husband live in Davis, California. She’s a professor in the writing program at the University of California, Davis, and is the author or co-author of nine books on teaching writing and reading to second language learners. Dana is a huge baseball fan and writes a weekly column for a San Francisco Giants fan blog under the nom de plume DrLefty. When not working, she also loves cooking, traveling and working out.

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Fluid Situations

A RECENT CNBC SURVEY found that more than half of Americans don’t have an emergency fund to handle life’s financial curveballs. The survey also found that seniors are more likely to have an emergency fund than younger adults, and men are more likely to maintain a rainy-day fund than women.




I don’t know how I’d manage if I didn’t have an emergency fund. Now that I’m retired from fulltime work, I try to keep to a fixed budget, but unexpected expenses keep blowing holes in my financial plan. I had two recent reminders of this. Both incidents are embarrassing—though for different reasons.




About a month ago, I had a couple of friends up to my mountain house for a visit. They were there for a few days and we had a lovely time, at least until the end. As they were getting ready to depart, one of my friends stepped out of the downstairs bathroom to give me the bad news that the toilet was clogged. He might have put down a bit too much paper before flushing, he told me sheepishly.




One must always be gracious in delicate situations such as these, and so, with hospitable good cheer, I told him it was no problem and reached for the plunger. Now, being a longtime homeowner, I’m no novice when it comes to clearing clogged toilets. Slip on a pair of rubber gloves, stand back, and plunge until you hear the satisfying gurgle of the clog giving way.




This time, however, the clog would not budge. Two hours after my friends had left for home, I was still plunging away, and the only thing I had accomplished was to spill much of the toilet’s contents onto the floor.




Ah, the joys of homeownership.




Desperate now, I did a Google search and located a local plumbing outfit in the rural area where I have my cabin. The friendly young lady who answered the phone told me that, as luck would have it, one of their on-call plumbers had an opening and would be able to come out right away.




Within the hour, the serviceman was standing inside the house in booties. After inspecting the mess in the bathroom, he worked up an estimate for what it would take to clear the clog. The visit itself would cost $85. Use of a drain snake would be another $275. If the snake didn’t work and he had to remove the toilet, it would be another $250.




After I picked up my jaw off the floor, I managed to find words to speak. The ensuing conversation went something along these lines.




Me: Holy cow. Do you think the drain snake will do the trick?




Plumber: It should, but I won’t know until I try it.




Me: Why is it so expensive?




Plumber: It’s an industrial-strength drain snake.




Me: Do I get to keep the snake after you’re done?




Plumber (laughing): No, no. The snake goes back with me.




Me (not laughing): If you were a carpentry shop, would you charge me by the hammer for services?




Plumber: We don’t provide carpentry services, sir.




He stood there, awaiting my decision. If he left, I’d owe him $85 and still not have fixed the problem, so I bit the bullet and told him to proceed.




It took the serviceman all of 10 minutes to clear the clog with the drain snake. After putting away that apparently gold-plated plumber’s friend, he charged my credit card $360 while I silently fumed. Nothing gets under the skin of a penny-pinching frugalist like being pickpocketed by someone who’s not even wearing a mask.




I was still steaming about that incident when, two weeks later, I got hit by another unexpected expense. This one, however, was entirely of my own making. 




I own a 26-horsepower Kubota diesel tractor that I use for mowing, snowplowing and other tasks at my mountain house. Every spring, before beginning the mowing season, I make sure to change the oil and filter, lube the grease fittings, and do other basic maintenance tasks taught to me years ago by my late father.






While I’m no mechanic, I’ve done dozens of oil and filter changes over the years, and I know my way around equipment. This day, however, I was not at my best. I had woken up with a bad headache, and was feeling washed out and muddy headed. 




I should have known better and saved the job for another day. But being both stubborn and impatient, I went ahead. After draining the oil and putting on a new filter, I dumped in four quarts of fresh oil and started the tractor. The engine fired, but roughly, blowing out smoke, which was strange, given that the Kubota is only a few years old and normally runs like a charm.




I turned off the engine and went to check the oil dipstick, which was when the realization of what I’d done hit me like a punch to the stomach. In my head fog, I had poured the new oil into the gas tank, not the oil tank. 




I couldn’t believe it. I’d never done anything so mechanically stupid in my life. Fearing I had ruined my nice new tractor, I called the dealer, who sent out a serviceman. 




The mechanic, when he arrived, assured me that what I’d done was not fatal and certainly wasn’t the worst thing he’d ever seen done to a tractor. The bulk of his repair jobs were from human—not equipment—errors, he said. This one, fortunately, was fixable.




He drained the oil from the gas tank, replaced the gas filter, and blew out the injector lines. Within the hour, he had the tractor running again, good as new. The bill: $350.




Ouch. 




I consoled myself that it could have been worse. I have a working tractor and a working toilet, and—as much as I hate to part with it—I have the money in my emergency fund to pay the $710 of new charges on my credit card.




The moral of the story? For me, it’s three things: Keep finding a way to fund that emergency account. Invest in an industrial-strength drain snake. And never, ever attempt a mechanical job when I have a headache—or else I may be creating an even bigger one for myself.

How much emergency money should you hold? Offer your thoughts in HumbleDollar’s Voices section.

James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, “The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life’s Purpose,” was published in 2022 by Blydyn Square Books. Jim blogs at PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.

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Not Crazy

SUPPOSE YOU WERE presented with two prospective investments. On the surface, they look similar, except one has outperformed the other in 12 of the past 15 years. Which one would you choose?

This example isn’t hypothetical. The two investments in question are the S&P 500 and the EAFE Index. The S&P 500 is broadly representative of the U.S. stock market, while EAFE stands for Europe, Australasia and Far East. It’s the most commonly referenced index for developed international stock markets.

Which has delivered the 12 years of outperformance? As you might guess, it’s the S&P 500. In fact, U.S. stocks have outperformed their international peers, on average, for more than 30 years. Because of this sustained outperformance, many investors have long since thrown in the towel on international stocks. That includes, notably, Jack Bogle, the late founder of the Vanguard Group, who said he never owned international stocks in his own portfolio.

In the investment world, the standard disclaimer is that past performance does not guarantee future results. It might seem that investors who limit themselves to domestic stocks are making a fundamental mistake in assuming that U.S. markets will continue to dominate. But those who believe in a domestic-only strategy aren’t just relying on past performance. They cite a number of other reasons U.S. stocks might continue to outperform.

First, the U.S. economy, in addition to being the largest, has some unique advantages. It produces more big public companies—especially in technology—than any other country, and that’s a key driver of our stock market. In Bogle’s words, the U.S. has “the most innovative economy, the most productive economy, the most technologically advanced economy and the most diverse economy.”

By contrast, many other major economies are struggling with challenges of one kind or another. In Japan, the population is shrinking. In France, workers have been protesting for months because the government has asked them to stay on the job a little longer before receiving their lifetime pensions. To be clear, the U.S. isn’t perfect. But on purely financial measures, the U.S. does stand apart, and that’s a reason many choose to stick only with domestic stocks.

In addition, because many of the largest American companies do so much business internationally, an investment in an American company provides a dose of global diversification. Take a company like Microsoft. Nearly half its revenue comes from outside the U.S. For Apple, it’s more than half. For that reason, Jack Bogle and others have argued that there’s really no need to invest in foreign companies to achieve international exposure.

Perhaps the most compelling reason some see international stocks as unnecessary: They’re highly correlated with domestic stocks. Asset correlation is measured on a scale from 0 (no correlation) to 1 (perfect correlation). On that scale, the correlation between domestic stocks and the EAFE index over the past 10 years has been quite high, at 0.88. To put this in context, stocks and bonds have correlations that range between zero and 0.3. That’s why bonds are very effective at diversifying portfolios. International stocks, on the other hand, provide some diversification, but according to this measure, it’s modest.

For all these reasons, it’s understandable why many investors look at international stocks and ask, “Why bother?”

In a recent paper, investment manager Cliff Asness responds to this question. He acknowledges that “international equity diversification has been a losing strategy for more than 30 years.” But he argues that, despite this history, investors should still embrace international diversification.

Why? Asness starts by pointing out that a major driver of domestic stocks’ recent outperformance is that they’ve simply become more expensive. That is, their valuations have risen. On this point, boosters of U.S. stocks are quick to argue that domestic stocks deserve higher valuations—because the U.S. economy is different from that of other countries.

Compare the top 10 companies in the S&P 500 with those in the EAFE index, and you’ll see a clear difference: While technology companies account for six of the top 10 names in the S&P 500, there’s just one tech firm among the top 10 in the EAFE index. This is relevant because technology companies generally carry higher valuations, and that arguably justifies the richer valuation for the U.S. market.

Asness, however, rebuts this argument, pointing out that this valuation gap is a new phenomenon. Domestic stocks haven’t always been more expensive. As recently as 2007, U.S. and international stocks were roughly at parity in terms of valuation. But today, domestic shares are 50% more expensive than their international peers. Because of that, Asness believes U.S. stocks are overvalued and sees international stocks as primed for a period of outperformance.

Asness’s second argument relates to the first. While the correlation data cited above indicate that domestic and international markets tend to move together, they don’t move in perfect lockstep. During periods of market turmoil, they do indeed tend to drop in unison. But over longer periods, Asness’s data shows that international diversification does work. Indeed, international stocks have outperformed in three of the past five decades—the 1970s, 1980s and 2000s.

The bottom line: International stocks don’t provide the same diversification benefit as bonds, but they do provide some benefit, and with returns that are much better than bonds. No question, international stocks have underperformed for a lot of years, but there’s no reason to believe that they’ll always underperform. Indeed, as Asness points out, there’s a key reason to believe recent trends might reverse: the valuation gap that’s developed since 2007.

That’s why Asness says international diversification is “still not crazy after all these years.” I agree, and that’s why I recommend investors allocate at least a portion—I suggest 20%—of their stock portfolios outside the U.S.

What percentage of a stock portfolio should be invested abroad? Offer your thoughts in HumbleDollar’s Voices section.

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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Free to Be

HOW WOULD YOU DEFINE financial freedom? That's the intriguing question I've been asked twice in recent weeks by journalists curious about the new HumbleDollar book, My Money Journey: How 30 People Found Financial Freedom—And You Can Too.

Financial freedom is something that pretty much everybody wants, and yet there’s no agreed-upon definition. Still, I think most folks would focus on two key elements: time and money. But I don’t think it’s a simple matter of having lots of dollars and lots of free time. Instead, I believe financial freedom rests on two key pillars.

First, we can spend our days as we wish. Time is the ultimate limited resource, which is why things that waste time—think doing the taxes, sitting in traffic or waiting at the Department of Motor Vehicles—can be so infuriating.

For better or worse, none of us knows how much time we have. But we know that one day it’ll run out, so it’s crucial that we make the most of the days we’re given. To that end, we should spend our time with those we love and we should spend it doing the things we love.

If we love our job and we like our colleagues, we may not have achieved financial independence in the traditional “I never have to work another day in my life” sense. But, arguably, we're pretty close:  Not only do we get to do what we love, but also we get paid for doing it.

That brings me to a notably silly definition of retirement. Over the years, I’ve occasionally heard readers argue that if folks are still earning money, even if it’s from part-time work in their 60s or 70s, they aren’t truly retired. That, I think, is a dangerous mindset. Next thing you know, these readers may decide that doing anything that looks like work—paid or unpaid—is against the rules of retirement, and soon they’ve committed themselves to a dreary life of nothingness.

My contention: We all need a sense of purpose, whether we’re working or retired. The blessing of financial freedom is that we can choose our purpose, deciding to devote our days to activities that we’re passionate about and that we find fulfilling. That might mean doing volunteer work for our favorite charity, our place of worship or the local library. It might mean painting, writing, carpentry or gardening.

There’s great pleasure in working hard at activities we care deeply about—and, indeed, I believe it’s one of the three key elements of a happy life. What if these activities happen to pay a little money? You won’t find me complaining.

Second, we rarely worry about money. Many folks fret constantly about their finances—because they have to. They struggle to live within their means, so every expenditure, even if it’s intended to boost their happiness, often instead ends up boosting their stress level. And, no, this isn’t just an issue for those with low incomes.

That raises the age-old question: Does money buy happiness? If we’re struggling to afford life’s necessities, the answer is a resounding “yes.” If we can lift ourselves out of poverty, or do so with assistance from others, our happiness will be greatly improved. Throw in a few thousand dollars in a bank account, and we’ll also have a sense of financial security that’s crucial to peace of mind.

But once we’ve achieved some minimum standard of living and have some sense of financial security, happiness becomes less about our absolute level of income and wealth—and more about our relative standing. A recent study found that the higher our income rises, the happier we’re likely to be, with the gains in happiness becoming ever smaller with each incremental dollar. That suggests that our income relative to others is what matters.

I’m not suggesting the research is wrong, though I do think the results are likely skewed by what’s called a focusing illusion. In other words, when those who are better off are asked about their happiness, they think about their fortunate financial standing relative to others and that prompts them to say they’re happy. This is the power of gratitude at work.

Instead, I’d argue that the researchers are focusing on the wrong “relative.” True happiness doesn’t rest on how we stand relative to others—though those around us may influence our material desires. Rather, happiness hinges on how we stand relative to our individual wants and needs, something that’s much harder for researchers to measure.

If we earn great gobs of money but our desires regularly run ahead of our income, we’ll suffer enormous financial stress—because we’ll never feel like we have enough. To be sure, earning more or having more means we’re more likely to have sufficient money to cover our wants and needs, but there’s no guarantee that we’ll indeed feel like we have enough.

That brings us to another important notion. Yes, money can buy happiness. But more important, its absence—not having enough or feeling like we don’t have enough—can lead to great unhappiness.

Financial freedom isn’t a seven- or eight-figure portfolio balance. Instead, it’s knowing we have enough to pay for the life we want. It’s the ability to enjoy two great luxuries—spending our time as we wish and not having to think about money.

How would you define enough? Offer your thoughts in HumbleDollar's Voices section.

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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Powering Up

SPRING TURNS A MAN’S fancy to... wait for it… outdoor power tools. Every April, I’d haul out the gas mower to prep it for the summer season. That meant a trip to the hardware store for oil, a spark plug and an air filter. Then I drove to the gas station for some new fuel.

For an hour, I would pretend that I understood the manly art of maintaining an internal combustion engine. I would gap and change the spark plug, clean or replace the air filter, and then add the fresh oil and gas.

Finally, it was time to pull the starter cord and hope to hear the engine roar. Or a cough followed by silence. There were times I’d forgotten to connect the spark plug or failed in some other significant fashion. After all was done, I’d wash at the laundry sink with gritty Lava soap, stripping grease, oil and little bits of my skin from my hands.

This year was different. Now, I own a battery-powered mower. Late in the 2021 season, during a moment of inattention, my mower blade whacked an immovable object. With a loud clang, my 12-year-old gas mower stopped dead. Suddenly, I was in the market for a new model.

I had to borrow a neighbor’s mower to finish my yard. Although I’d just destroyed my own, he bravely lent me his relatively new Toro self-propelled gas mower that adjusted its speed to your walking pace. Pretty nifty. I told him I was thinking of a battery model. He shook his head, expressing concern over whether an electric model would have enough power.

My brother-in-law had already bought an EGO battery-powered mower. I called to get his view of it. He said he was happy with its performance, but then he lives in the Southwest, and so has a different mowing environment than I do in green Ohio.

Next, I consulted the reviews in Consumer Reports. It had very positive test results and no major power issues were noted. EGO mowers are sold through Lowe’s. Comments on its website and Amazon were favorable, and also mentioned that the mower can mulch grass and leaves.

That’s an important attribute for my tree-filled yard. Besides, my quarter-acre suburban lot—with significant areas devoted to planting beds—isn’t exactly a big spread to cover. I thought an electric model could handle the job.

EGO won points from Consumer Reports for its ecosystem of products. Interchangeable batteries worked with its leaf blowers, trimmers, weeders, chainsaws and more. I already owned an EGO blower. While its smaller battery would fit the mower, it probably wouldn’t be sufficient to cut the lawn. There are limits to interchangeability, although it’s handy that both batteries power off the same charger.

I took the plunge. I bought a self-propelled mower light enough to push in most situations. After multiple uses, I’ve become a convert. The mower cost almost $600, including tax, perhaps $100 more than my neighbor’s gas-driven Toro.

In 2022, Consumer Reports published a calculator comparing the costs of electric versus gas mowers. It shows a relatively short breakeven point for the higher-cost battery-powered mowers because they cost less to operate than gas models.

The real payoff has been the new mower’s convenience. I recharge the removable battery for less than an hour after mowing. When it’s time to mow again, whether it has been a week or the whole winter, I simply insert the battery, push the start button and begin mowing. My hands never smell like gasoline. I’m never breathing fumes. And even my neighbor has commented on how quietly it runs.

My brother-in-law facetiously suggested that I can now thumb my nose at “Big Oil.”  I don’t think the few gallons of gas or quarts of oil I’m saving each year will make a difference to Exxon.

While walking behind my mower, I do ponder the environmental pros and cons. Yes, I’m saving gas, oil and exhaust, and I no longer have to transport used oil for recycling or run out to buy gas.

My mower’s lithium-ion battery does have a finite life, however. I store the battery in the house to avoid the temperature extremes in the garage, which I hope will extend its life. Replacing it costs $300, and I’ll have to learn where to recycle it.

What happens to all the old batteries? Are they completely recyclable? And what are the implications of mining the materials to make the batteries? I don’t have all the answers.

Yet I have settled the question of the mower’s power to my satisfaction. Autumn brought the ultimate test. I ran the mower through piles of leaves before bagging them for recycling. No problems. If there was a light coating of leaves left on the lawn, the mower mulched them right in. The bottom line: I may have questions about the mower’s battery. But I’m a believer in its functionality.

Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured—along with five others—on the cover of Kiplinger’s Personal Finance for an article titled “Secrets of My Investment Success.” Check out his previous articles.

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Unkind Cuts

AS A RETIREE FOR WHOM Social Security payments are my financial foundation, it’s worrying to hear about a potential cut in benefits 11 years from now—because I’ve seen this movie before.

If Congress does nothing, benefits would drop 23% in 2034. It’s an unfathomable situation, but one that most pundits believe is unlikely. Let’s hope. Thankfully, I feel secure that my state pension—one third of my monthly income—will stay solvent.

More than 40 years ago, Congress and President Reagan made significant changes to Social Security’s rules, including one that would have hurt my family if it had happened just a few years earlier. As a fulltime college student in the 1970s, I received a monthly payment from Social Security because my father was disabled by a stroke when I was 12 years old.

Since 1981, payments to children of retired, disabled or deceased parents typically cease at age 18 or upon high school graduation. The policy changed because many elected leaders believed needs-based financial aid programs, such as Pell grants, would fill the void for lower-income families. At the time, student enrollment and eligibility could not be readily verified, as it can today, thanks to the electronic filing of the FAFSA, the Free Application for Federal Student Aid form. In 1978, the Social Security Administration estimated that as much as $150 million a year was being overpaid because students were no longer going to college fulltime.

Although the benefits weren’t needs-tested, it was reasonable to assume that a college student whose parent was disabled, retired or dead didn’t have significant family income. Average 1972 benefits were $1,017 for students from the lowest income families (under $2,500 a year) and $1,344 for students from the highest income group (over $20,000), according to a 1977 study by the Congressional Budget Office.

I can’t recall precisely how much I received each month, but I think it was about $100. It certainly helped. I attended a state university that had much higher in-state tuition than most others. I was fortunate that my grandfather paid my tuition for all four years, but the Social Security payments helped considerably, especially with room and board. I also worked part-time and summers.

Could I have gone to Penn State or any other college without the help of Social Security? Yes, but it wouldn’t have been as easy, and I doubt I’d have been eligible for Pell grants or other assistance because my mother was still working.

Because of the help I received, I’ve always been happy to pay my share of Social Security during my 40-plus years of work. But today, my benefits are more than a helping hand. They’re my bedrock. I hope Congress finds a way to shore up the program without making cuts.

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The Price Isn’t Right

YOU’VE PROBABLY HAD the same experience I’ve had when shopping for clothes. Spring’s in the air—a great time to take advantage of the local clothing store’s annual winter clearance sale. You buy that Ralph Lauren cashmere sweater at 20% off and jaunt home basking in glory. But the next day, while out for a walk, you peek at the store’s window display and see the same sweater, but now marked down 30%. You return home bemoaning your impulsivity.

Welcome to the befuddling world of closed-end funds.

The proclamation that closed-end funds can be bought for a 10% or bigger discount is no less tempting than that handsome sweater. But it’s just a come-on. How so? All closed-end funds have two prices. There’s the market price at which you can buy and sell—and then there’s the net asset value, which is the value of the fund’s holdings expressed on a per-share basis.

The good news: The market price might be below the net asset value, allowing you to buy the fund at a discount. The bad news: Unlike a regular mutual fund, there’s no guarantee you can sell your closed-end fund for its net asset value. Instead, you must trade at the market price, which bounces around with the mood of the market.

Still, if a closed-end fund owns stocks you’d like to have in your portfolio, it might be a good candidate for purchase, but only if the current discount is greater than the usual discount over, say, the past five years. Timing—a dicey dalliance in its own right—holds the key. A closed-end fund’s discount is typically largest when its stock portfolio is most out-of-favor.

To see how much premiums and discounts can fluctuate, let’s look at BlackRock Health Sciences Term Trust (symbol: BMEZ), a closed-end fund focused on smaller health and biotechnology names.

The BlackRock fund’s discount is currently almost 15%, versus a 9% average over the fund’s history, which means the fund is attractive, though not as big a bargain as it has been. Back in December, before the recent health tech revival, the discount was a whopping 18%, perhaps an opportunity for a high-wire deep value investor, but a catastrophe if you were out of Xanax or needed to sell.

Indeed, in 2022, the BlackRock fund’s portfolio declined 23% but its market price plunged 33%. That plunge might seem especially surprising given that the fund sells options on about a fourth of its portfolio, a strategy designed to limit losses.

Providers of closed-end funds are quick to glorify their very high distribution rates, often mistakenly referring to them as dividends. Annual distributions can exceed 10% of a fund’s share price, are usually paid monthly, and are artificially made to appear smooth and predictable, a marketing ploy to attract retirees and other income investors. How can the distribution rates be so high? It’s flimflam.

Here’s how it works. Closed-end fund distributions are paid from three main sources: dividends, capital gains and a category aptly named “return of capital.” If Vanguard Group’s health care fund (VGHCX) yields less than 1% and Fidelity’s biotechnology offering (FBIOX) hardly anything at all, how can the BlackRock fund throw off about 10%? It can’t, at least not without some skullduggery. When dividends and capital gains meet expectations, all is well and the BlackRock fund’s distribution cruises at almost 1% a month without robbing the net asset value of your investment.

But what if the BlackRock fund’s dividends and market gains fall short of the desired distribution? How can the fund managers possibly make good on their effort to maintain a high monthly payout when we know that the average dividend of smaller health growth stocks is about 1% a year? The standard fix for the small but devoted closed-end fund community is simple but hardly kosher.

Like many closed-end funds, BlackRock Health Sciences plugs some of the leak by reaching into your own money as part of the “distribution,” a practice known as destructive return of capital. What if the distribution rate eventually proves unsustainable? A fund will cut its distribution. This precipitates pandemonium in the fund’s price as all those hoodwinked income investors bail.

Consider the payout for BlackRock Health Sciences over 2023’s first four months. Each month’s distribution was 14½ cents a share, so we’ve met the constancy criterion. According to Morningstar, January’s distribution was paid from short-term capital gains, another promise kept. But the picture turns grim in February, March and April, when the 14½-cent distributions were merely a return of shareholders’ own money. There’s your ill-gotten twist on the proverbial money back guarantee.

The litany of closed-end fund sins and drawbacks doesn’t stop with return of capital. Expenses for the Vanguard and Fidelity funds are 0.3% and 0.72%, respectively, whereas the comparable figure for the BlackRock fund is 1.32%. Even that is low compared to many closed-end funds, which are vestiges of the high-fee fund era of yesteryear. And remember, unlike mutual funds which are transacted at their closing net asset value, closed-end funds are bought and sold like stocks during the trading day. Because most closed-end funds trade on light volume, they’re subject to uncommonly large bid-ask spreads.

But why worry about such nonsense? Today, there’s no need to—thanks to the flourishing worlds of index-mutual funds and exchange-traded index funds.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

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