Jonathan Clements's Blog, page 152

When to Spend

IF YOU HAVE READ enough HumbleDollar articles, you’ve probably noticed that frugality has played a major role in the financial success of many of the site’s writers. Peruse the article comments and the site’s “Voices” section, and you’ll find that readers often share the same thriftiness. Frugality is also a key theme running through many of the 30 financial life stories in the forthcoming book, My Money Journey. Sure enough, I highlighted frugality in the essay I contributed to the book, as well as in my most popular HumbleDollar article to-date.

But while we might be good at saving, we often aren’t nearly so successful at spending. We find ourselves investing quite a bit of emotional energy in every spending decision—because we feel so acutely the opportunity cost of parting with our money.

For those in the accumulation phase, every splurge means less money toward building their nest egg. For those in retirement, a big expense means a big drop in their portfolio balance. Could that mean a greater chance of running out of money? At a minimum, any spending takes away from what heirs would otherwise inherit.

An awareness of opportunity cost is a pillar of smart financial management. But when the time comes to splurge, how can we feel less conflicted and freer to really enjoy ourselves? As I reflect on my own ongoing attempts at balance, I find that I’m most at peace with decisions to splurge when I can confidently answer five questions.

What am I really paying for? My capacity to enjoy luxury goods and experiences follows a curve of diminishing returns. Perhaps the $50 steak tastes better than the $15 steak, but I confess my palette is not sophisticated enough to taste the difference in the $100 version.

I don’t want to pay extra just for the privilege of being able to say I did. When I feel like I’m paying a premium simply for access to the abstract concept of luxury—but not something of substance I really care about—I have a hard time relaxing and enjoying it.

But I also notice my tastes have adapted over the years when I’ve given new things a chance. For example, I once considered the Omni Grove Park Inn in nearby Asheville, North Carolina, to be in this category. Then I received a generous gift card to go there, so Sarah and I gave it a shot last summer.

The experience won us over. We’ve already been back again. The day passes to the spectacular spa complex were $200 a pop and it took $450 for one night in even the smallest room at the historic inn. Still, it was worth every penny.

Do you enjoy such indulgences? Aim to be light-heartedly honest with yourself. It won’t do you any good to be too uptight. In fact, that may be a sure route to spoil the pleasure from such spending.

Will it suck me in? Do you remember the story If You Give a Mouse a Cookie? A boy gives a friendly overalls-clad mouse a cookie, which leads the mouse to ask for a glass of milk to wash it down. Then comes the request for a straw, then a napkin, then a mirror to check for a milk mustache. The dominos continue to fall until the mouse has exhausted his friend with a full day of requests.

When I’m assessing a potential splurge, I’m vigilant about avoiding that kind of trap. I’m looking for something I can enjoy free of any further encumbrances. If one purchase will undoubtedly lead to another, I’m wary.

I tend to feel that way when I go into one of the specialty mountain outfitters that are plentiful here in East Tennessee. I usually walk in open-minded. I’m not an avid outdoorsman by any stretch, but I do love and appreciate nature. “Maybe I’ll find something for my next hike,” I tell myself.

But then I stumble upon the pricetag for what appears to be a long-sleeve shirt, but it’s actually a $100 ultra-performance base layer. I immediately start extrapolating that rate-per-garment over an entire outfit. Then I decide nature will be just as much fun in ordinary clothing.

A house is the ultimate high-stakes example of this phenomenon. You have to commit to the mortgage, pay the closing costs and incur the moving expenses. But then the real spending begins: You’ve got to furnish the house, decorate it, landscape it, insure it, secure it, outfit it with appliances and technologies, serve it with utilities, maintain and repair all that, and then do it all again because you’ve already tired of what you picked out the first time. For this reason, a house is the worst kind of splurge. If your next home feels like a stretch, it’s best to let it go.

Does it make my wife happy? I’m not saying she has to enjoy every expenditure as much as I do. But if she has reservations, I’ll pass. I know she wants what’s best for me, and I’m not afraid to admit that sometimes she knows better than I do. Besides, I value peace in our home and in our marriage more than I value anything I could possibly buy.

One possible exception: If I can sense that she’s fine with the object of the spending but hesitant about whether we should part with the cash, I might present some rationale for the purchase in an attempt to put Sarah at ease. If that still doesn’t work, it’s time to drop it.

Does it sound like me? Don’t get me wrong: I think trying new things and taking novel adventures can be great, splurge-worthy fun. I just don’t want to give in to every passing whim. Throw in a few nights’ sleep between the initial spark and the decision to spend the money, and I often find I’m simply no longer interested in the bright, shiny object that caught my attention. I find I have less buyer’s remorse if I splurge on things that I’m confident will have staying power.

A great example is the $10.94 I pay every month for my premium Spotify account. Maybe that doesn’t sound like much of a splurge, but if I could express how much I loathe paying for monthly subscriptions, it would. I try to avoid these monthly bank account drains, which is getting harder and harder to do.

Still, I gladly pay every month for music. Why? Music has been important to me all my life, and I’ve never enjoyed it more than now. Previous generations couldn’t have fathomed the luxury we now casually regard as standard—virtually every album from every artist available at our fingertips.

I can conveniently binge-listen to the discography of my longtime favorite band Switchfoot. If I discover an interesting new album while reading reviews in Bluegrass Unlimited magazine, I can immediately listen to every track. I can sing along with my favorite worship music, which improves my attitude like nothing else. I can bring multiple generations of our family together to reminisce about favorite classic country tunes. I can DJ an impromptu dance party for my girls. That $10.94 a month is a steal.

Will I make memories with loved ones? I’m not implying that it’s necessary to spend a lot of money to make memories. Indeed, many of my favorites didn’t involve spending much at all.

But every so often, circumstances force me to make a choice. Maybe it’s an invitation from friends or family, and I have to decide: Will I spend the money and be part of the experience or will I hold off for another day? I’ve only taken 35 trips around the sun, but I’ve known enough life to realize that time is short. That’s why I’ve become much more likely to say “yes” in these situations—because making memories with family and friends is what I want my splurges to be about, and I know I’ll only get so many chances.

This is how I ended up happily shelling out $190 for a single ticket to a college baseball game last summer. My Tennessee Vols were playing for a berth to the College World Series, and my usual baseball game crew—my brother-in-law and a few friends—had found tickets for us. I couldn’t say “no.”

It’s why I paid $670 to renew our Dollywood passes for the upcoming season, even though we’ve been to the theme park probably 20 times over the past few years. With each visit, we have the pleasure of reliving old memories and making new ones—and I want to experience that with Sarah and our girls as many times as possible.

Matt Christopher White is a CPA and CFP® who writes about money and apprenticeship to Jesus. He's the author of “How to Love Money: Four Paradoxes that Breathe Life into Your Finances,” available at MattChristopherWhite.com . Matt is equally comfortable talking about Luke 6:43, Section 643 of the Internal Revenue Code and the 6-4-3 double play. There’s no place he’d rather be than with Sarah and their two girls, Lydia and Eliza, at their home in the foothills of the Smoky Mountains. Follow Matt on Twitter @WriteMattWhite and check out his earlier articles .

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Paid With Pain

INVESTING IS PRETTY simple. If you don’t need to touch your money for 10 years or so, a good chunk of it can be invested in a globally diversified basket of stocks, preferably using very low-cost index funds. The likelihood that your stock holdings will have lost money after a decade is quite low, and exceedingly low if your holding period is 15 years or longer. Moreover, your investment is likely to outperform all other asset classes, including bonds, cash, gold and commodities.

But while investing in stocks may sound simple, it’s far from easy. And that has nothing to do with your level of financial sophistication or stock-picking acumen. Amateurs and professionals alike struggle in this arena, even when the road to success is as simple as buying and holding index funds.

The recent collapse of Silicon Valley Bank and Signature Bank bring back painful memories of the Great Financial Crisis. Which bank will be the next domino to fall? Are we on the precipice of another catastrophic bear market, like that of 2007-09? Should I sell stocks now and wait for the dust to settle?

Personally, I don’t believe that recent bank failures presage another financial crisis, but I’m humble enough to realize that I simply don’t know. Nor do I have any idea if the stock market will soar or collapse in 2023, although the fact that no one is talking about the former raises its likelihood.

But here’s one thing I do know: Over the next five years or so, news of the past few weeks will be forgotten. Fear will ultimately give way to greed. And stock prices around the world will probably be higher, possibly much higher.

Call me a Pollyanna or a head-in-the-sand investor. Bears always sound smarter than bulls. But history is on the side of the bulls. It’s easy to forget what stocks represent—ownership in real companies that mostly earn profits and pay out dividends. People don’t go to work each day to fail. Most people work hard and want to win. In the end, that explains why stocks have provided generous returns to investors over the long run, about seven percentage points per year above inflation.

But it’s never easy. If stocks always went up, investing would be a stress-free and everyone would become rich. But if it were truly that easy, future stock returns would—ironically—fall. After all, dividends have historically comprised roughly half the total return of stocks. As share prices rise, dividend yields fall, trimming future returns.

The fact that stocks occasionally fall hard and induce fear sow the seeds of a generous “equity risk premium,” the higher long-run return that stocks provide relative to bonds and cash. In short, the fear of losing money—leading some investors to sell and others to sit on the sidelines—is a primary source of the generous returns earned by patient and courageous stock investors.

So, it’s your choice. You can pull your money out of the stock market when the news is grim, being content with the lower volatility and lower returns afforded by bonds and cash. When the financial turmoil has passed, you can return to the stock market, albeit at much higher prices.

Or you can steel your resolve and pay the price of admission that the stock market exacts. That price is not monetary—in fact, when fear is greatest, stocks go on sale. Rather, the price is emotional. You must learn to stay the course or even buy more when every nerve in your body resists. When all you see are paper losses and all you hear are cries of financial Armageddon, you must force yourself to look beyond the carnage and quietly whisper, “This too shall pass.”

History is clear. Common stocks are the surest path to long-term wealth. But don’t fool yourself: It’s never easy.

John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition. Check out John's earlier articles.

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The Power to Adapt

"IT DOESN'T MATTER IF our planned trips might jeopardize our retirement savings." The word “jeopardize” was spoken with a sarcastic tone.

It was clear my two financial-planning clients didn’t appreciate my message. They were adamant. Their 10 pricey National Geographic trips, which would span the globe, must remain on their bucket list.

So began a challenging chat. Based on their excitement about their retirement wish list, it would have been easier to simply applaud their exotic plans. The vivid travel brochures looked splendid to me. While appreciating their excitement, it seemed prudent to ask if they might consider one or two National Geographic expeditions combined with a few less costly trips.

Their response to my suggestion to cut back: “Absolutely not.”

I get it, we never know how long our mobility and health will last. This accomplished couple explained that, after a lifetime of hard work, these trips would be their grand reward. My questions about the future sustainability of their funds didn’t feel like pressing questions to them. They had little interest in reviewing other ways they might scale back their lifestyle, such as downsizing or moving to another state. Even raising the possibility that one day they might run out of money couldn’t temper their enthusiasm for their exciting dreams.

As it turned out, we never learned if they’d experience financial difficulties pursuing their wish list. Soon after our discussion, the husband came down with a chronic illness that made it necessary to be within a few hours of his Boston-area doctors. But the story didn’t turn tragic. This seemingly inflexible couple suddenly had no choice but to adjust their previous bucket list.

They identified exciting canoe trips accessible on New England rivers and found the best regional bird-watching expeditions. The new plans soon captivated them. In the following months, they sent me beautiful pictures of their trips and marveled about the many outdoor options that were available nearby. Out of necessity, they had rewritten their narrative.

I began to wonder how many other people require a major life crisis to increase their willingness to explore other possibilities. The irony is, many folks approaching retirement already have concerns about covering future bills. Yet even those with substantial financial assets may box themselves in with an inflexible wish list. According to a survey from Natixis Investment Managers, 35% of millionaires agreed with the statement, “It will take a miracle to achieve a secure retirement.” Would these millionaires worry less if they had discovered the power to adapt when necessary?

When making retirement projections, we tend to emphasize numbers. Software programs provide calculations which indicate the percentage likelihood that someone will or won’t run out of money. What’s not included in these software programs is the person’s emotional openness to adapting when needed.

Some people define a successful retirement within narrow parameters, while others can develop new possibilities even while cutting back. Rather than push their budgets to the brink, people can identify creative alternatives ahead of time. How might you enhance your flexibility quotient? Here are five steps to consider:

1. Don’t limit your options. Focus more on the feeling of excitement and less about a set way to satisfy it. Finding alternatives doesn’t mean you’re settling for less.

2. Explore the emotional attraction. Why are certain choices important to you? The appeal may have more to do with the friends or family who’ll be involved and less about the actual activity.

3. Consider your wish list’s financial ramifications. This can help determine the total cost and enable you to envision less expensive alternatives.

4. Develop a nonjudgmental mindset. There’s no shame in changing plans. You don’t need to justify modifications to your wish list to others. Avoid worrying about what other folks might think if you decide to shift gears.

5. Celebrate creative options. Life throws us curve balls in terms of wealth, health and relationships. Can we learn to focus on what’s really important to us and adapt as needed? Those who possess this skill will have an invaluable emotional resource.

Rand Spero is president of Street Smart Financial, a fee-only financial planning firm. He provides comprehensive financial services to help clients organize, increase and protect their assets through life transitions. Rand teaches personal finance and strategic planning classes at universities in the Boston area, and also hosts the podcast series Financial Crossroads. Check out his earlier articles.

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Dress Rehearsal

RETIREMENT IS SAID to be a time for reviewing and reminiscing. We try to understand who we were and how we came to be who we are. But the health trials of the retirement years can also project us into the future. When couples enter their twilight years, they begin to contemplate how they’d cope if the other died first. I believe “survivor rehearsal” is one way our biology helps us to contain the fear of having to cope on our own.

Some people think this rehearsal process is disrespectful or self-indulgent, and maybe that’s why it’s a phenomenon rarely discussed with partners or friends. Still, in U.S. society, I suspect survivor rehearsal is almost universal, though some folks may feel too guilty or ashamed to admit it.

Ever since my wife Alberta was diagnosed with breast cancer six years ago, I’ve found myself directing my own survivor movie. My need to experiment with different scenarios—and feel how they might play out—is surprisingly strong, though it’s not at all clear what this movie will look like. As things stand, my own precarious health makes me more likely to predecease Alberta than the other way around.

Knowing me so well after 40 tumultuous years, Alberta helps me discern which scenes are likely to roll out smoothly and which will require more than one take. If I’m the survivor, I know I’d have to grapple with my health on my own, be more proactive about my social agenda and maintain a mutually comfortable relationship with my son Ryan. And all the while, I’d need to work through the unimaginable grief of losing my best friend.

Investing has been a major theme in my adult life, but I’ll need to control it better than I do now. Today, my modus operandi starts with a merry addiction to following market movements and developments. But should I be the survivor, I’ll also be fending alone in the social and entertainment arenas, where I have depended on Alberta to be my concierge. It would be tempting to submerge myself in the financial domain, where I’ve had some success and feel more confident. My romance with the stock market looms as both a blessing and a curse.

Quite by contrast to my passion for the market, I dislike the responsibilities of private real estate investment. Our residential income properties served us well as an appreciation compounder and diversifier, but 40 years of direct ownership takes a toll, and I have no desire to shoulder the burden on my own.

I have a wonderful property manager, but she can’t shield me from all the vulnerabilities of private real estate investing. I want to wake up Monday morning looking forward to a pancake breakfast with an old friend and not obsessing about the mold my tenant—a lawyer, no less—found growing on his bathroom ceiling.

Different scenes about how I’d handle the properties play out in my imagination. I would love to shed the entire landlord business. But I’m trapped. I bought several small income properties starting in 1983 and have enjoyed substantial appreciation, which means a massive potential tax liability. I could potentially sell by taking advantage of one of real estate’s most egregious tax loopholes, the 1031 exchange, which would delay capital gains taxes.

But the transaction requires identification of the replacement property within 45 days of the sale and its purchase within six months. It’s an unnerving timeline, may force settling for a less-than-ideal substitute, and is vulnerable to a time-consuming dispute at the closing or a disastrous pullout by the buyer.

Besides, I don’t want to replace one set of properties with another. Rather, I want to cash out and diversify across liquid investments like cash, bonds and broad stock market index funds. I would allocate the largest amount, maybe as much as 30%, to real estate investment trust ETFs, which trade like stocks and would keep a healthy stake in property ownership without the headaches.

I’m also dissuaded from cashing out entirely by another preposterous feature of the tax code. If the properties are inherited, the heir’s cost basis is stepped up to the value of the investments on the date of death. The capital-gains tax bill I face today need never be paid, and selling now would mean forgoing that governmental gift.

My real estate predicament poses a dilemma: escape from a few years of bondage by unloading the properties or follow the financially prudent course. I, alas, know which course I’ll take. Ryan’s welfare and my family heritage trump my comfort zone. No, that’s not exactly a Hollywood ending for my peace of mind, but it is indeed a rational and loving final act.

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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Food for Thought

EXCEPT FOR A SCALLION or cucumber—feel free to add other items—finding something green in your refrigerator is generally not good. This morning, I reached for the butter and caught a glimpse of dark green. It was a wedge of never-opened goat cheese, $5.60 worth. Or, to view it another way, $253 in lost retirement savings over the next 40 years.

Before we left for Florida this winter, we removed from the fridge all items that would not survive six weeks. That process alone triggered a debate over what to keep or throw. In any case, a lot of money went in the trash. Many of the things we found upon our return had simply been forgotten during our pre-trip purge. Like goat cheese.

According to Feeding America, nearly 40% of all food is wasted in America. An estimated 39% of that waste occurs at home, amounting to some 42 billion pounds of food each year, including my 0.51 pound of cheese. I often wonder how anyone knows that statistic. I suspect it won’t be long before high-tech kitchen appliances report our every wasteful action.

I also decided to look in the pantry for old food. Sure enough, there was a cache of forgotten cans, jars and boxes, including a jar of beets. I haven’t eaten beets since forced to by my mother in 1952. The jar said “use by 3/23/2018.” It must have come with us when we moved to our condo.

In addition, I found souvenir food that was either way outdated or questionable as to its use. Souvenir food is the stuff you buy in gift shops when traveling. It seems cool at the time, but when you get home, you’ll never cook anything as intended. I found Real Texas BBQ rub, Cajun spices, cactus jelly, and paprika from the last time I was in Budapest. When was the last time I was in Budapest? My favorite find was a “special” tea you sip from a gourd. I picked it up in Argentina. I was told it was very relaxing, which is yet to be determined.

When on a cleaning spree, don’t give too much credibility to expiration dates. Except for baby formula, there are no federal regulations on food dating. The “use by,” “best by” and “expiration” dates are pretty arbitrary and more intended to reflect a decline in flavor—unless the product has turned green, of course.

It’s possible to waste money in other ways, too, like on junk food and snacks. One estimate says we spend nearly $30,000 in a lifetime on salty and sweet snacks. Based on the annual spending rate on snacks of almost $480 a year and a 10% investment return, cutting them out could turn into more than $230,000 over 40 years. As I’ve said before, let me at your shopping cart and I’ll find savings that will put you on track for early retirement, and maybe lose weight, too.

While all this throwing away and snacking is going on, the U.S. manages to rank as the most obese country in the world, if you exclude an array of Pacific Islands and Kuwait. It would appear our financial woes aren’t caused by what we fail to put in the bank, but rather by what we put in our mouth—or planned to and forgot about.

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Building a Barbell

IN THE WEEKS SINCE Silicon Valley Bank (SVB) disintegrated, there’s been a fair amount of post-mortem analysis. In the end, two factors drove the bank’s demise.

First, SVB’s customer base was concentrated among venture capital-backed technology companies. Because of that, nearly 90% of deposits topped the FDIC threshold and were thus uninsured.

Second, owing to 2022’s rise in interest rates, SVB’s bond portfolio took a hit. That sparked concern about the bank’s solvency, prompting depositors to overwhelm the bank with withdrawal requests.

Those explanations are accurate, but they’re also very specific to the management of a bank. There is, however, a more general—and very valuable—lesson we can all learn from the Silicon Valley failure. We can start by taking a closer look at the problem the bank had with its bond portfolio. What exactly happened?

As you’re probably aware, bond prices decline when interest rates rise, and vice versa. That can be a serious problem for those with sizable bond portfolios. But fortunately for institutional investors like SVB, there’s a way to mitigate the risk posed by rising rates: Bonds can, in effect, be insured using an instrument known as an interest rate swap.

When rates rise, these swaps provide a hedge against losses, and Silicon Valley Bank did indeed employ swaps. As of year-end 2021, it had hedges in place to protect $15 billion of the bonds on its books. During 2022, however, the bank decided—for reasons that aren’t completely understood—to drop nearly all those hedges. By the end of 2022, hedges remained on just $560 million of its bonds.

That move alone might not have doomed SVB because not all bond portfolios require hedging. It depends what a portfolio looks like. But as you might guess, SVB held precisely the types of bonds that did need protection. Why’s that?

As noted above, bond prices drop when interest rates rise. But this effect is magnified for longer-term bonds. All things being equal, a 10-year bond will lose much more than a one-year bond when interest rates rise. That was the heart of SVB’s problem. It had positioned a sizable chunk of its portfolio in bonds maturing beyond 10 years. It was the losses on that portion of the portfolio that were the bank’s undoing.

In other words, SVB had a bond portfolio that was risky—and that it knew was risky—but nonetheless decided to eliminate virtually all the protection it had previously put in place. That, of course, was in addition to its concentrated depositor base. While no one can be sure, I suspect SVB might have survived if it had been carrying just one of those risks. But in combination, SVB’s managers had no place to turn when things didn’t go their way.

As individual investors, what can we learn from this? In my view, the lesson is clear: It’s okay to take risk, but if you’re going to take risk in one area, be sure to have sufficient protection elsewhere to offset that risk. What does this look like in practice? Below are five examples.

Portfolio construction. The stock market has been a reliable way to build wealth—but it’s also volatile. How can you offset that risk? By doing exactly the opposite of what Silicon Valley Bank did: Instead of taking unnecessary risk with long-term bonds, stick mostly with short-term issues, those with durations of three years or less. You could purchase individual bonds or opt for funds like Vanguard Group’s short-term Treasury ETF (symbol: VGSH), its short-term municipal bond fund (VWSUX) or its inflation-protected bond ETF (VTIP).

In the investment world, this approach is referred to as a barbell, with allocations at either end of the risk spectrum helping to balance each other. The more weight you have on the riskier end of the barbell, the more you’ll want to add to the safer end. In SVB’s case, it had far too much on one end and not nearly enough on the other. As an individual investor, you want to do the opposite.

Does that mean you should never own intermediate- or long-term bonds? Total bond market index funds, which are quite popular, carry an intermediate-term maturity. It’s okay to own a fund like this—and it certainly wouldn't be as risky as what SVB owned—but these funds do still carry material risk. Last year, they saw double-digit losses, while short-term funds like those mentioned above experienced losses of less than 5%. For that reason, I recommend that short-term holdings make up the majority—up to 80%—of a bond portfolio. You could then add a modest amount of intermediate-term holdings. For individual investors, I see no reason to own long-term bonds.

While working. How should you allocate your portfolio during your working years? I recommend thinking about a portfolio in segments. If you’re 10 or more years from retirement, I think you can take as much risk as you’re comfortable with in your retirement accounts—up to 100% in stocks. But taxable accounts are a different story. They serve a critical purpose, providing a backstop in case of job loss or an unexpected expense.

For that reason, a taxable account should almost always be allocated more conservatively than a retirement account. How conservatively? To decide, you’ll want to assess the likelihood of a rainy day. This is specific to each individual. What’s most important, though, is that you build a barbell with your retirement and taxable accounts. Less risk in one allows you to take more risk in the other.

Pension benefits. If you’re in the lucky minority who’ll receive a traditional pension—especially a government pension—typical asset allocation rules of thumb probably won’t apply. Most people, for example, reduce their stock holdings as they get older. But if your pension, together with Social Security, will meet most of your retirement expenses, you can afford to position your portfolio much more aggressively than someone without a pension.

Of course, you should never take more risk than your stomach allows. But if you expect to spend only a small amount of your savings during your lifetime, it’s logical to allocate your portfolio with an eye toward the next generation. If you have 40-year-old children or 10-year-old grandchildren, or plan to leave a large portion of your assets to charity, it would make sense to invest more aggressively than most others your age.

Social Security benefits. Suppose you’ve done the math and decided you want to wait till age 70 to claim the largest possible Social Security benefit. I think that makes sense for most people, but it does pose an asset allocation problem.

If you retire at 65, with five years to go before starting Social Security, what should your portfolio look like on the first day of retirement? Should it reflect your initial, higher withdrawal rate, or the reduced rate that will begin five years later? Mike Piper, an accountant and personal finance writer, offers a solution: He suggests building a “bridge” to Social Security.

Say your benefit at age 70 will be $40,000. Piper suggests setting aside $200,000 (five years x $40,000) and holding those dollars in either cash or short-term bonds. Since those funds will provide a nearly risk-free bridge to Social Security, you can then allocate the rest of your portfolio more aggressively, reflecting your future, lower portfolio withdrawal rate once Social Security begins.

Private funds. What if you have private fund exposure, such as a venture capital, private equity or hedge fund? Is there a way to offset this risk? When it comes to private funds, I’m sometimes accused of being the Grinch. But here’s my approach: In looking at the sustainability of a portfolio, I ask what would happen if the value of any private fund holdings went to zero.

Why such an extreme position? Unfortunately, I’ve seen it happen more than once. When it comes to private funds, there’s simply a much lower level of transparency and investor protection. How can you offset this risk? My personal approach is to avoid investments like this altogether. But if you do choose to invest, a reliable way to offset this risk is by sizing the investment appropriately. Invest an amount that’s large enough to make a difference if it does well—but not so large that it would cause a real problem if it doesn’t.

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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So Much to Like

THE BEAR MARKET HAS now dragged on for 15 months—and no doubt plenty of anguished investors are second-guessing their allocation to stocks. But as for me, I grow more enthusiastic with every drop in the Dow Jones Industrial Average. In fact, I’d be happy to see the bear market last a few months longer, so I can finish fully funding various tax-advantaged accounts for 2023.

Not only are stocks better value than they were 15 months ago, but also the long-term benefits remain as impressive as ever. What benefits? Here are nine reasons I have 88% of my retirement portfolio in stocks.

1. Economic growth. Across the globe, billions of people strive every day to make their lives better—and, as an owner of stocks, I stand to profit from their hard work and innovation.

Consider the 50 years ended December 2022. During that stretch, nominal U.S. GDP grew 6.2% a year. Corporate profits grew even faster, notching 6.8%, and those rising profits propelled the S&P 500 to a 7.2% average annual share price gain.

The S&P 500’s performance was helped by a rise in the market’s share price-to-earnings multiple, which climbed from 18.3 at year-end 1972 to 22.2 at year-end 2022, thus adding 0.4 percentage point a year to the market's return. On top of the 7.2% annual share price gain, investors also collected dividends. The S&P 500’s dividend yield was 2.7% at the beginning of the 50 years and 1.7% at the end.

2. Faster compounding. Over the past 100 years, stocks have notched a total return of more than 10% a year. I wouldn’t count on earning 10% in future—remember, rising P/E ratios and higher dividend yields contributed to that gain—but I would count on stocks beating bonds by perhaps three or four percentage points annually over the long haul. That might not sound like much, but the difference is huge when compounded over many decades. Let’s say stocks notch 8% a year, while bonds earn 5%. Over 30 years, stocks would soar some 900%, while bonds would gain just 330%.

Keep in mind that we’re talking here about the broad stock market. Want to be sure you’ll capture whatever gains the market delivers? Forget trying to pick market-beating stocks and sectors, because such efforts could derail your portfolio's performance. Instead, it’s crucial to diversify broadly, preferably using total market index funds.

3. Unlimited upside. Got money you'll need to spend in the next five years? You should have it stashed in nothing more exciting than high-quality bonds. But that comes at a cost: If you buy bonds and all goes well, you’ll get the promised interest payments each year and you’ll get back your bonds’ principal value when the bonds mature—and that's it.

By contrast, with stocks, there’s no limit to how much you might make. Indeed, stocks offer a wonderful asymmetry: While the potential gain is infinite, the most you can lose is 100%—whatever sum you invested. Yes, in the short term, stocks are more likely to fall sharply than bonds. But in a worst-case scenario, such as a corporate bankruptcy, bondholders may also get wiped out, just like the company’s shareholders.

4. Heads you win, tails everybody loses. What if we’re talking about a truly worst-case scenario, such as a nuclear war, the overthrow of capitalism or a global economic collapse? Don’t kid yourself: It won’t much matter what you own, whether it’s stocks, bonds, bitcoin or gold, though a large stash of canned goods might come in handy.

What if catastrophe doesn’t strike and world economic growth keeps rolling along? A globally diversified stock portfolio should eventually emerge triumphant. In other words, stocks aren’t just the optimist’s bet. Arguably, they're also the only logical bet for long-term investors—because, if the global stock market isn’t winning long-term, it likely means the worldwide economy has ceased to function and we have much bigger problems to worry about.

5. Tax-favored. If you hold stocks in a taxable account for the long haul, not only will your dividends and capital gains likely be taxed at the lower long-term capital-gains rate, but also you’ll largely control when your stocks are sold and hence when that capital-gains tax bill is triggered. In fact, if you hang on to your stocks and bequeath them to your heirs, the embedded capital-gains tax bill may never be paid, thanks to the step-up in cost basis upon death.

By contrast, the interest thrown off by savings accounts, certificates of deposit and taxable bonds are dunned at the higher income-tax rate, plus the bulk of your expected return is paid to you every year and hence there’s no built-in tax-deferral, like there is potentially with stocks. Of course, this tax disadvantage doesn’t matter if you hold interest-generating investments in a retirement account—which is why I have all my bonds in my traditional IRA.

6. Liquid. If you need to sell your vacation home to raise cash, it will likely take at least a few months to turn your property into a pile of dollar bills. By contrast, you can sell your stocks and stock funds whenever the financial markets are open. Admittedly, for those given to panicky decisions, this ease of selling is a mixed blessing. But for the rest of us, who want to invest for the long haul while also having the option to sell at short notice, the liquidity offered by the stock market is a huge plus.

7. Low cost. Again, this is where stocks rule and real estate stinks. When I sold my New York apartment in early 2022, I surrendered more than 8% of the selling price to legal fees, the real-estate commission, transfer taxes and fees, and more. And that, of course, followed years of property taxes, monthly building maintenance fees, repair costs, homeowner’s insurance and so on. By contrast, my Vanguard Group index mutual funds cost nothing to buy and sell, and the cost of holding them amounts to just $1 a year for every $1,000 invested.

8. Low minimums. According to the National Association of Realtors, the median sale price for an existing single-family home was $363,000 in February. Meanwhile, you can get started in the stock and bond markets for $1.

9. Easy to diversify. Because homes cost so much, it’s hard to build a diversified portfolio of properties. But thanks to mutual and exchange-traded funds, it’s a cinch to reduce risk by diversifying across bonds and stocks, including real estate investment trusts—a wise choice for those who like property ownership but don’t like fixing leaky faucets.

What does it take to enjoy the nine impressive benefits listed above? All that’s required is some upfront dough and a long time horizon. Sure, you have to sit tight through some occasional market unpleasantness. But I, for one, consider that a small price to pay.

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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March’s Hits

RETIREMENT ARTICLES usually dominate our list of the prior month's most popular pieces—and that was true again in March—but last month also saw a fair amount of interest in investment articles and blog posts. Here are March's best-read pieces:

The 4% retirement spending rule has come in for a fair amount of criticism. Adam Grossman looks at a key alternative: the guardrails approach.
"Many people get ahead in life by living beneath their means," writes Marjorie Kondrack. "But by the time they achieve financial stability, the frugal habits of a lifetime are hard to temper."
"The No. 1 threat to your retirement might not have anything to do with what the stock and bond markets do," says Dennis Friedman. "Instead, it could be the No. 1 killer in the U.S.: heart disease."
Two of Jim Wasserman's credit cards were hacked, with goods worth $50 charged to each. He disputed both charges. That's when things got really strange.
Thinking of moving to a 55-plus community when you retire? Marjorie Kondrack introduces readers to a new option: “resort living” communities with executive chefs, room service, a concierge and more.
Phil Fisher was a hugely influential investment thinker—and yet one that many folks today have never heard of. Dan Dawson offers three key insights from Fisher's 1958 bestselling book.
"Risk is highest at precisely the point when everything looks most rosy," notes Adam Grossman. "By the same token, the opportunity for profit is greatest when investors are feeling most downbeat."
"That’s how I built my wealth over the years—by not owning a lot of stuff," writes Dennis Friedman. "The less you own, the more money you can save."
Want a simple yet resilient investment portfolio? John Yeigh takes a look at one suggestion: 90% in a Vanguard target-date fund and 10% in small-cap value.
Are you retired and thinking of buying a second home near your adult children? Steve Abramowitz details why this is a bad idea, financially and otherwise.

Meanwhile, among our Wednesday newsletters, the most popular were Robert Port's Case Closed and Larry Sayler's Driving Me Crazy, while the most popular Saturday newsletters were two of my pieces, What I Don't Own and The Other Enough.

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Chasing Yield

THREE YEARS AGO this month, in the middle of the pandemic-driven market meltdown, I went on a dividend-stock buying spree.

I had just turned 60 and was looking to step away from the corporate world in 18 months’ time to take up a second-act career as an author. As part of my retirement plan, I had a sizable money-market account that I planned to live on for a few years before I started taking Social Security and pulling from my retirement accounts.

The money-market account wasn’t paying much—about a half-percentage point—but I knew the cash was secure, which was important as I stepped away from a steady paycheck. Then COVID-19 hit. Stocks nosedived and government bond yields plummeted as investors rushed for safety.

Everywhere I looked, I saw quality, blue-chip stocks trading at huge discounts. Many of these stocks were dividend aristocrats with a long, unbroken record of steadily increasing their dividends. Exxon, for instance, was trading in the mid-$30 range. The stock of pharma giant AbbVie was trading in the upper $60 range. Coca-Cola was trading under $40.

Some of these dividend stocks were yielding close to 6% at these distressed prices. Being a bit of a contrarian by nature, I began to question why I was holding cash in a money-market account where I was earning next to nothing when I could be getting a 5% or 6% yield, with upside potential when the stock market came back.

It was risky, yes. Some of these companies could cut their dividends or stop paying them altogether. There were rumors that Exxon, for example, would be cutting its dividend for the first time in nearly 40 years, which was why its stock was trading at such a discount.

Still, the risk-reward calculus of buying quality dividend stocks at beaten-down prices just seemed too favorable not to take advantage of. I was still working, after all. If the dividend stocks didn’t end up coming back, I could always work another year or two to rebuild my cash account.

After doing my research, I took a big chunk of my cash and bought positions in individual dividend stocks that were being recommended by the experts: Exxon, AbbVie, Coca-Cola, AT&T, PPL, Dow Chemical, Blackstone, Public Storage, Archer-Daniels-Midland, 3M and a few others.

Three years on, Exxon’s stock has tripled. Abbvie, Dow and Blackstone have doubled. Coca-Cola and Public Storage are up some 50%. None of the stocks I bought stopped its dividend, and a few, such as Exxon and Abbvie, have continued to raise their payouts.

Unfortunately, a few of my high-yielding stock purchases haven’t done so well. AT&T, for instance, has lost nearly half its value, while 3M has also been a dog.

Overall, however, my gamble has paid off. My account value has increased while I’ve also collected three years of dividends. I was able to step away from my corporate job on schedule in September 2021.

Now, with the stock market up more than 50% from its March 2020 lows and interest rates much higher, I’m reversing course. I am selling most of my dividend stocks and putting the money into high-yielding money-market accounts and certificates of deposit. For instance, I was recently able to secure an 11-month certificate of deposit (CD) at Capital One paying 5%.

I now own only three dividend stocks: Exxon, AbbVie and AT&T. I’m keeping the first two because the companies are well-managed and continue to increase their dividends. I’m keeping AT&T because the new management team there seems to be turning things around. Still, I may sell those three remaining positions in the weeks to come to further lower my risk and raise cash.

I realize that I’m selling into a weak stock market right now. But at the same time, it’s a market that’s offering the highest money market and CD rates in more than two decades. If I’m able to get a 4% or 5% risk-free yield on my cash, I’m happy with it, even if I’m not keeping up with inflation.

Would I do anything differently if I could do it all over again? Yes, instead of buying a basket of individual dividend-paying stocks, I would buy a dividend index mutual fund or exchange-traded fund like iShares Core High Dividend ETF (symbol: HDV) or ProShares S&P 500 Dividend Aristocrats ETF (NOBL). By going with an index fund, I would have better diversified my portfolio against the losses of any one single stock, such as AT&T.

Lesson learned. Still, I’m happy I took the opportunity three years ago to buy into a down market. By taking a little risk, I have a bigger cash cushion to help me ride out the market during these early years of retirement.

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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Gift of Knowledge

MY UNCLE GAVE ME one share of Chevron for my 20th birthday. It was 1995, and he was the stock transfer agent for the company, overseeing its dividend reinvestment plan (DRIP). The share was a modest $48 gift, but the accompanying advice became the foundation of my investing career for the 27 years since.

As a young kid, I would comb through the business section of the Pittsburgh Post-Gazette, monitoring the performance of my dad’s two mutual funds. Understanding the basics of stocks and mutual funds came easy. But when I reached adulthood, acquiring both stocks and funds was confusing and prohibitively expensive. The internet was just starting to take off in 1995. Financial services were still plagued by high investment minimums and exorbitant fees.

DRIPs were an exception. Also known as direct stock purchase plans, DRIPs enable employees and investors to buy stocks directly, rather than going through a brokerage firm. Programs vary by company, but most have low investment thresholds and minimal or zero transaction fees.

When the stock certificate with my uncle’s signature arrived in the mail, his accompanying advice was to invest new money every month and reinvest the dividends. Keep that up, he said, and eventually I'd earn enough in dividends to buy whole shares. Someday, the dividends would be significant enough to supplement my primary income.

I was studying finance in college in 1995, while also making $6.25 an hour as a photographer’s assistant, developing film and printing pictures for the faculty newspaper. The $62.50 I earned every week wasn’t much. But after the usual beer and burrito expenses, I’d have $25 or $50 leftover each month to mail to the Chevron DRIP.

This investing habit continued through graduation and into my professional years. The contribution amounts grew when I started earning a salary, as did Chevron’s stock price and its quarterly dividend. My Chevron stock started earning enough dividends to purchase whole shares, just like Uncle Jim said it would.

I added more DRIPs to diversify, including Coca-Cola and Verizon. Soon, DRIPs started accepting electronic contributions and providing online access. Meanwhile, my first employer offered a 401(k) plan, allowing me to jumpstart my retirement savings with tax-deferred investing in stock mutual funds, which gave me badly needed diversification.

At the same time, discount brokers began emerging online, making it easier and less costly than dealing with a human stockbroker. Exchange-traded funds (ETFs) became widespread, offering an alternative to mutual funds—one with no required minimum investment.

Today, the popularity of DRIPs has fallen significantly because of commission-free online brokers. Within minutes, young investors can download an app, open an account, connect their bank accounts and invest their first $1 into an ETF that has more than 4,000 holdings.

We’ve come a long way. But while the mechanics of investing are straightforward compared to 30 years ago, young investors face a paradox of choice. Too many options can lead to bad investment decisions.

Many of us are parents, aunts and uncles now, and we may feel it’s incumbent upon us to share our investing wisdom with younger generations. Though many won’t listen, let alone read an article on HumbleDollar, we can still offer our advice in hopes they’ll acknowledge it or grace us with a belated “thank you” two decades from now.

That single $48 Chevron share from my uncle is now worth about $360 and has paid me $161 in dividends over the years. More valuable was his advice, which launched a lifelong passion for investing and which ultimately led me to leave an unfulfilling career to become a fulltime financial writer.

His advice to start early, invest often, dollar-cost average and maintain a long-term outlook remains relevant today. Still, I’d suggest the following additional guidance as we bestow our unsolicited wisdom upon younger generations.

Diversify. The first stock I owned still thrives today. But my uncle could have worked for Kodak. The good news: Modern investment products—notably ETFs—provide instant, low-cost diversification.

On top of that, technology and loosened laws have opened up opportunities for retail investors to own diversified alternative investments once reserved for wealthy and institutional investors, such as commercial real estate, farmland, private credit and even fine artwork. Such investments aren’t a must-have and they should only account for a small percentage of a portfolio. Still, they’re a sign of how much the investment world has changed since 1995.

Eliminate fees. Even though the Chevron DRIP was the best available option at the time, it still nickeled and dimed me with recurring transaction fees. Today, young investors can virtually eliminate fees by buying a low-cost index fund such as the Vanguard Total Stock Market ETF (symbol: VTI) through a commission-free online broker.

Reduce taxes. My Chevron DRIP is a taxable account. The government has taken a slice of nearly every dollar I’ve earned in dividends. Today, Roth IRAs are almost as easy to open as taxable accounts, and a great choice for young investors with a low earned income who would get scant tax benefit from a traditional IRA’s initial tax-deduction.

Invest in yourself. Trying to identify the next high-risk, high-reward investment has wounded investors for centuries. Options, cryptocurrencies, forex, meme stocks and other shiny objects may seem to promise rapid riches, but more often they have the opposite effect.

Instead of speculating on assets that fluctuate at the whims of the markets, I’d favor investing speculative dollars in ventures where the individual has more control over the outcome. Start a business, acquire undervalued rental properties or master a highly sought-after expertise. The potential rewards are, I believe, far greater.

Craig Stephens writes about personal finance and investing at Retire Before Dad and Access IPOs . Follow him on Facebook and on Twitter @RetireBeforeDad .

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