Jonathan Clements's Blog, page 177
November 18, 2022
Happy Talk
PESSIMISTS SEEM LIKE they’re clever and sophisticated, but—if you want to make money—take my advice: Invest like an optimist.
I’m not talking wild-eyed optimists who are over-enthused about meme stocks and nonfungible tokens. Instead, I’m talking about a fundamental belief that economic setbacks are temporary and the future will be better than the past. Struggling to stay cheery amid 2022’s rotten financial markets? Here are five reasons for optimism.
1. The news is terrible. Whether it’s the war in Ukraine, high inflation, sluggish economic growth or depressed financial markets, there’s plenty to despair about. While October's inflation report and the stock market's modest bounce back have offered glimmers of hope, the mood remains grim.
I see it in HumbleDollar’s website traffic. Do you avoid looking at your portfolio when share prices are down sharply? It seems the same phenomenon afflicts folks’ appetite for investing and personal finance articles. HumbleDollar’s traffic slipped during the early 2020 bear market and I’ve seen it dip again this year.
This disinterest, bordering on despair, is no doubt helping to further depress today’s stock and bond prices. Investors may not be dumping securities in disgust. But there’s certainly none of the rampant enthusiasm for stocks that we saw last year. That's good news for those who are courageous and have cash to invest.
2. Expected returns are rising. As stock and bond prices fall, the outlook for future returns grows brighter. The clearest example: Check out what’s happened to the yields on 10-year Treasury Inflation-Protected Securities, or TIPS.
Today’s buyers of 10-year TIPS are getting 1.6% plus an adjustment to reflect inflation, while a year ago they were getting an adjustment for inflation minus 1.1%. I currently have my bond portfolio split between short-term conventional and inflation-indexed government bond funds, but the rise in TIPS yields has me pondering a move into intermediate-term inflation-indexed Treasurys.
Whatever bonds return, stocks should be priced to return even more. After all, why else would investors take the extra risk involved? With the S&P 500 stocks at 21 times trailing 12-month reported earnings and yielding 1.7%, versus 24 times earnings and a 1.3% yield a year ago, we’re looking today at the prospect of higher long-run returns. Again, these improved valuations have put me in a mood to buy, which I wrote about a month ago.
3. Wall Street charges less. Whatever the financial markets deliver, investors should be able to pocket more of that return. Discount brokerage firms are waiving stock-trading commissions. The bid-ask spread on blue-chip stocks is tiny. The competition among index funds is fierce—some have no expense ratio—and the variety of offerings is huge. (But note to Vanguard Group: I would love to see an emerging markets fund with limited or zero China exposure.) Today, you can build a great index-fund portfolio and easily pay less than 10 cents a year for every $100 invested.
4. Investment taxes are modest. The tax code is stacked in favor of investors. For those investing through a regular taxable account, both qualifying dividends and long-term capital gains are taxed at barely half the federal income-tax rate, plus any capital-gains tax bill can be deferred until you realize your gains. Meanwhile, tax-favored investment accounts abound, including tax-free Roth and 529 college accounts. And let’s not forget health savings accounts, which can potentially offer both an initial tax deduction and tax-free withdrawals.
5. We all want better. This final point is the most nebulous—but it’s also the most important. Every day, folks around the world wake up, trying to figure out how to make life better for themselves and those they love. We all benefit from the energy that’s unleashed.
For proof, look no further than the effort put forth in 2020 to escape the grip of the pandemic. It wasn’t just the scientists who created vaccines within months. It was all the businesses—large and small—that figured out how to continue operating in such a strange time.
Are we seeing the same effort today? You can count on it. Shoppers are figuring out how to reduce inflation’s bite. Workers are hunting for jobs that’ll pay them more. Businesses are fighting to stand out in their battle with competitors who are complacently passing along higher costs. And once again, we will all benefit.

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Spending Their Future
WHY DO SOME PEOPLE save more for retirement than others, even when their income is the same? It turns out that a difference in spending behavior, rather than a larger salary, may separate better savers from those who struggle to set aside funds for their future.
The Employee Benefit Research Institute and J.P. Morgan Asset Management joined forces to examine the spending and saving behavior of 10,000 households. The households, which were analyzed by age cohort, were divided into three groups based on the percentage of salary each contributed to a 401(k) plan. In the bottom 25%, low savers sock away about 2% to 3% of their income. Middling savers—those in the middle 50%—save about 5% to 6%. High savers, in the top 25%, start by contributing about 9% of salary and increase that amount as they get closer to retirement.
The researchers then compared the salaries of low and middling savers, and found that the two groups earn about the same. Yet, even though there’s only a small difference in salary between low and middling savers, at all ages middling savers sock away about three percentage points more toward retirement than low savers. This difference is meaningful down the road, as the two groups approach retirement age. Compared to low savers, middling savers accumulate twice as much by age 60.
What drags down low savers and keeps them from achieving the same results as middling savers, who earn an equivalent salary? The answer is spending. Low savers spend about 2% to 3% more of their salary than middling savers, especially when they’re younger. This difference in spending may account for the additional savings that middling savers set aside for their golden years.
The bulk of the difference consists of increased spending on housing, transportation, and food and beverages. Throughout their working years, low savers consistently spend more on these three categories than middling savers. Spending on other needs, such as education and clothes, is similar, while low savers spend slightly less on travel compared to middling savers.
It seems that, for some workers, spending is the culprit siphoning off money that should be used for savings. But it isn’t clear what’s driving this higher spending. Is it a desire to satisfy today’s immediate wants, such as a fancier car or pricey restaurant meals? Or do the necessities of life just cost more for some people, and therefore hamper their ability to save?
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Made You Look
I LOOKED UP OUR investment account balance recently. It’s something I’d avoided doing for months. My wife, the voice of reason, said we might bounce a check if we didn’t know how much was in the money market fund. Confession: I don’t balance our checkbook manually.
I waited to log on until after the Dow Jones Industrial Average shot up 14% in October, its best month since 1976. I don’t know why the bear lost its grip on the Dow last month, but it seemed like an opportune time to see how much damage had been done.
We’d lost nearly as much as we’d paid for our house in 1997, yet our balance was higher than when I retired in July 2020. We’d essentially surrendered the last 18 months of gains—the gains that the market had given us in 2020 and 2021.
One of my jobs as a senior editor at Vanguard Group was to make a down market seem palatable to the firm’s investors. When stocks fell sharply, a senior executive would invariably call me from the back of a taxi to suggest that we do a “market story.”
By this, he didn’t mean we should write a piece that began, “Sell everything while you can still get out alive.” No, we needed a story that would calmly assure investors that we’ve experienced much worse drops before and the market had always recovered and gone on to new all-time highs—eventually.
This has the virtue of being true. But it’s not always easy to be the voice of reason when Mr. Market is having a panic attack. When stocks collapsed in September 2008, I’d written just such a story of reassurance. It was ready to be published on Vanguard’s website. It said Congress had passed a large rescue package to shore up the stock market and the economy—a story I’d written in advance of passage.
Incredibly, the House voted the package down while I was watching it live on C-SPAN. On a second monitor, I watched in shock as the stock market jumped off a cliff in reaction. The Dow plunged 777 points—then the largest points drop in its 112-year history.
At that moment, I left a voice-mail message for a colleague saying something like, “Don’t elevate that story, the House has just done something incredibly stupid, and the market’s falling down an elevator shaft.” She told me later that it sounded like I was going to cry.
I didn’t, but it did feel like an out-of-body experience, like falling off a ladder and thinking, “This can’t really be happening.” Yet the lesson I draw from that whole dismal experience is the market did eventually recover and I made a lot of money.
By spring 2009, I’d decided that stocks were irrationally beaten down, so I shifted my 401(k) balance to 100% stocks. That’s my version of capitulation.
In 1930, at the start of the Great Depression, the great English economist John Maynard Keynes said that the economic dislocations of his age were only temporary. The central message Keynes conveyed was one of optimism.
“This is only a temporary phase of maladjustment,” he wrote in an essay in which he tried to predict what life would be like for his grandchildren. “All this means in the long run that mankind is solving its economic problem. I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is."
Was he right? Yes. Between 1930 and 2010, per-person income grew 5.6 times higher in the U.S., after adjusting for inflation, according to Nobel-prize-winning economists George Akerlof and Robert Shiller. An exceptionally long-lived stock investor would have done even better. A $100 investment in the U.S. market in 1930 would be worth $29,101 today, even after factoring in inflation.
With each downturn, it becomes easier for me to believe that this too shall pass. Yet it still bothers me to see my account balance lower than it was previously. Intellectually, I know this must happen to me as a retired investor. But psychologically, I feel like I’d rather not see it.

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November 17, 2022
My Furry Friends
I'M KNOWN AS A FRUGAL, rational and practical spender. My husband Jim likes to remind me that, six months into dating, my first birthday present to him was prefaced with, “I think I know what you want and need.” It was a three-compartment laundry hamper to separate his clothes before washing.
But one area where I’m neither rational nor practical is cats. I wholeheartedly agree with Jim Kerr’s recent dog story, where he wrote that a pet is a terrible investment—if we’re only considering money. Unfortunately, knowing this rationally and denying myself a furry friendship are two different things.
We recently returned from a family vacation in Portugal with our two sons. Having previously lived in Spain, we realized how much we miss the slower-paced, life-celebrating Iberian way of living. Jim and I have a renewed itch to live there again, at least part-time.
We moved back to the U.S. last year to be closer to our sons, who work in Texas. In discussing our renewed desire to live overseas, Jim and I agreed that the best balance would be to alternate six months in Portugal with six months in the U.S. We’re not getting any younger, and our go-go travel years will end one day.
We plan to rent an apartment in Portugal while maintaining our home in Texas, which gives us the best of both worlds. We’ll have a base from which to explore Portugal, other European countries and the rest of the world, plus a home in Texas where our family and friends can easily gather and connect.
The only snag in this plan is our cats. Traveling back and forth across the Atlantic every six months with cats isn’t impossible, but it is difficult. We’ve done it twice in the past four years, and there were many hoops to jump through, all accompanied by loud howls and meows.
Moving to Spain in 2018 required as much paperwork—all at a cost—for our two cats as it did for ourselves. We also had to find an apartment that allowed cats, which added complications and reduced our choices among long-term rentals. The hardest part, however, was simply arranging the transatlantic flight with our two cats in the cabin.
Only some airlines allow cats to fly transatlantic. Those that do allow a limited number of small pets on board, and that quota can fill up quickly. Lufthansa was highly recommended for flying to Europe by most American ex-pats.
We flew Lufthansa, but the airline rerouted our flight to Spain through Frankfurt. This threw us into another paperwork scare because, while the cats were cleared for entry into Spain, we weren’t sure if they were permitted in Germany. Happily, it all worked out.
Then there’s the challenge of the cats’ cooperation—or lack thereof. One of our cats passed away in Spain and we adopted a Spanish street cat that hates traveling. During the entire 24 hours of the car and plane trip back to the U.S., she had one loud message. No me gusta—I don’t like it.
She cried—make that howled—the whole trip from Alicante to Paris to Atlanta to Dallas. There were three crying babies on our transatlantic flight, which prevented us from being the most-hated passengers onboard… well, almost.
Now we’re toying with twice-a-year travel across the Atlantic. Without our cats, we would’ve already gathered our paperwork and applied for Portuguese long-term residence visas. Anticipating fractious feline flying, however, we’re hesitating. It’s illogical.
I know we aren’t alone. Behavioral economics acknowledges that human decision-making is often irrational. Nowhere is this better demonstrated than with pets. From a logical perspective, if we want to be able to travel freely, we’d be much better off without them.
To make matters more complicated, we’ve just adopted yet another cat, a young male named “The Dude.” We fostered him for a bit and then found we couldn’t let him go. On our first night back from Portugal in early October, all three cats curled up with us and made a warm human-cat pile on the bed.
Jim and I have had tremendous luck financially, helped partly by keeping each other rational about our money decisions. We check each other’s blind spots.
But let’s call this one our double-blind spot. No matter how illogical cat ownership may be, they’re part of us and we can’t separate them from our lives.

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Too Much Cash?
I'VE SPENT THE PAST seven or eight years lamenting our cash position, both the interest it was earning and the size of it. The former was too little, the latter too much.
Some years ago, we sold an investment property with the idea of buying another somewhere we might potentially retire. But as I noted in a recent article, we’ve never been able to settle on where that would be. We were also constantly thinking we were going to move or be moved away from the Houston area, where my job had deposited us, and that we might want the cash for a house in our new location. Of course, despite repeatedly raising the possibility of a relocation to my higher-ups, this never happened.
The result: Hundreds of thousands of dollars have languished in cash, with me grousing about it—at least until last year, when I retired. But with the volatility in the stock and bond markets that soon followed, this large cash position has probably contributed to the quality of our sleep.
Still, I know high inflation is eating away at it. True, a majority of this money is in a 401(k) stable value fund, which provides higher rates than are available in most other options. Our stock position is now three percentage points off our target, and is politely asking for a rebalance. Add the coming proceeds from the house we just sold, and the voice becomes more insistent: Shouldn’t we be buying stocks?
Well, maybe, except we may still want to purchase a property. We’ve decided to store everything and travel, but for how long? We could tire of living out of suitcases and decide to pick a place from our U.S. short list, or we might pull the trigger on a part of Italy that we like. This might be in a few years, or we might stumble on something in our first few months of travel. If that happens, we’ll be glad to have cash on hand, rather than having to get a mortgage—especially if we settle on a foreign country—or being compelled to sell stocks at a market low.
Not counting the proceeds from this year’s house sale, the cash in our taxable account would cover a few years of living expenses, although exactly how large those expenses will be has become more nebulous, given our lifestyle change. We can approximate them at “more.” Even before considering a potential property purchase, we’ve introduced our own uncertainties, financial and otherwise, into our lives. Where’s our roof? Where are our doctors? How quickly can we be settled somewhere again if care is needed or, alternatively, get to a family member who needs us? An extra margin of safety for a while isn’t an altogether bad thing.
So, as much as my DNA as a (former) longtime accumulator says to buy into the current stock market weakness, I’m not positive it’s the right call for us. It’s not so much concern about the next turns in the market that gives me pause, but the fact that we might need this cash in the near term—and, if we need it soon, it doesn’t belong in the stock market. The good news: We don’t need to create a margin of safety by selling stocks today. We already have it.
What we’ll likely do is move a significant portion of our taxable cash position into Treasury bills, either building a ladder of one-year bills or sticking with three-month Treasurys. These are yielding more than high-yield savings accounts and certificates of deposit, and are liquid, fully guaranteed by the U.S. government and carry little interest rate risk. Yes, it’s possible to lose money if rates continue to rise and we want our money before maturity, but the possible loss seems minimal.
With interest rates rising, we’ll also want to think more about where we hold our cash, so it’ll be accessible yet minimize taxes on the income. Rather than buy the Treasury bills in a taxable account, we may choose to buy a tax-efficient stock fund there, and then offset this with an equal shift from stocks into Treasury bills in an IRA. When we need cash, we can then reverse this maneuver, selling stocks in the taxable account and offsetting that with an equal shift from Treasury bills to stocks within the IRA.
Of course, what’s most likely to happen is we’ll continue to hold what seems like a lot of cash, I’ll continue to bemoan the opportunity cost, and we’ll go another few years before buying anything. Meanwhile, the stock market will head back to new highs. But at least I’ll sleep well.

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November 16, 2022
Bought to Be Sold
I'M STILL AMAZED WHEN I speak with friends and neighbors who have no idea what their home is worth. They tell me they might sell in the near future. When I ask them how much they think they'll get, they say something like, “I’m not sure, I’m meeting a real estate agent next week.”
Homeowners always need to know how much their home is worth. You can’t wait until your boss tells you about a great opportunity in Honolulu to start determining your home’s value. Like selecting an agent to sell your house, you need to plan ahead. Every home is bought to be sold.
If you don’t know how much your home is worth, how do you know your agent is listing it at the correct price? I don’t want to hear that you can just look at Zillow. Besides having to deal with the unfriendly layout and the slow loading pages, if you spend any time at all looking at Zillow, you’ll quickly realize that its Zestimate® isn’t worth Zit®, as it can easily be off by 25%. Many times, a listing will contain a Zestimate® history graph that looks like Elvis’s EKG.
The adage that “selling your home is the biggest financial transaction of your life” is as old as it is correct. And you’re going to trust an algorithm for guidance? I might trust one to find me a wife, but not when half-a-million smackers are on the line. By the way, where I live, after a home is sold, Zillow doesn’t even list the final sale price.
What’s a proud homeowner supposed to do? If it were me, I’d solve this problem the same way I solve every problem—with a spreadsheet.
In the first row, enter all the relevant real estate details: address, square feet, list price, sale price, date, bedrooms, bathrooms and so on. In the second row, enter the details of the home you purchased. Then ask the agent you used to buy your home to set up an automatic email to be sent to you every time there’s an MLS update for your neighborhood. As new homes in your area come on the market and get sold, update and analyze the spreadsheet accordingly.
You aren’t done yet. You need to attend the open houses for the above homes. I personally don’t see this as a chore, as I live in a condominium and am fascinated to see how other unit owners live. More important, it's a way to determine how similar other condos are to mine. Do they have new Macassar Ebony hardwood floors, an updated kitchen with a Thermador dual fuel 48" Pro Grand stainless steel range or a Pottery Barn Galvez 67" clawfoot painted bathtub? It’s also a great way to get design ideas, contractor recommendations and meet the neighbors.
While you’re at the open house, chat with the listing agent. It’s a chance to put your finger on the pulse of the local market and shop for the seller’s agent you’ll eventually need.
You may think you’ll live in your home forever. Trust me, in all likelihood, you won’t. Remember, every home is bought to be sold.
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November 15, 2022
Some Now More Later
MY WIFE VICKY AND I have lately been discussing���yet again���when to claim our Social Security retirement benefits. We're fortunate to have multiple sources of retirement income, including a defined benefit pension, traditional IRAs, Roth IRAs and two health savings accounts.
To date, we had assumed we'd both delay claiming Social Security until age 70, so we get the largest benefits possible. Until then, we'd planned to live on my pension, any consulting income I earn, and withdrawals from our retirement accounts. But we're now rethinking that plan for a handful of reasons:
Federal taxes. Social Security benefits are favorably taxed at the federal level. At most, 85% of benefits are considered taxable income. By contrast, withdrawals from traditional retirement accounts are fully taxable at the federal level.
State taxes. Social Security isn���t taxed in New Jersey, where we live. Meanwhile, pension income and withdrawals from retirement accounts are potentially taxable in New Jersey. That potential tax is driven by an exclusion algorithm based on gross income.
Retirement assets. This year���s down market has put a big dent in our retirement savings. We have a cash bucket set aside, but I���d prefer a bigger margin of safety, so I can give our stock market money plenty of time to recover.
Interest rates. Today���s higher interest rates make holding cash more attractive.
Maximizing Social Security. I���ve been using several tools, including Mike Piper���s excellent Open Social Security, to look at different strategies for getting the maximum lifetime benefit. Open Social Security suggests the best strategy is for my wife to claim benefits immediately and for me to wait until age 70. This maximizes our lifetime benefits, and would also provide the largest possible survivor benefit to Vicky, should I predecease her.
Collecting some Social Security income right away is also appealing from a tax point of view. As I mentioned above, Social Security income has tax advantages at the federal and state level compared to other retirement income.
I���m especially focused on New Jersey���s retirement-income exclusion provision, which includes three ���cliffs������for joint filers they���re at incomes of $100,001, $125,001 and $150,001���that can trigger a big jump in state taxes. If we claim Vicky���s benefit now, it would reduce how much other retirement income we need and potentially help us avoid stumbling over these tax cliffs.
After considering all the variables, we���ve decided to start Vicky���s Social Security benefit in 2023. She can apply for Medicare next month, at which time she���ll submit a joint application for both Medicare and Social Security. The latter will give us some inflation protection, thanks to Social Security���s annual cost-of-living adjustment, which next year will be 8.7%.
Even with Vicky���s Social Security, my pension and other income, we���ll still have a shortfall between the income we receive and what we spend. To fill this gap, I���m looking at several options. I could continue to do monthly withdrawals from our cash fund. This money is held in Vanguard���s Short-Term Bond ETF (symbol: BSV). The fund has a current yield of around 4.8% and a low expense ratio of 0.04%. Unfortunately, the fund hasn���t been immune to this year���s market woes, falling 6% year-to-date.
Another option I���ve been considering is a period certain immediate��annuity. This type of annuity provides immediate income for a specified period of time. This is one way to bridge the five years between now and when I claim my Social Security at age 70. One of the benefits of a period certain annuity is you���re guaranteed to receive all the payments. Should I die within the five-year period, my wife���or her heirs���would receive the remainder of the 60 payments.
I looked at five-year annuity pricing through Fidelity Investments and ImmediateAnnuities.com. The two sites provided essentially the same result. A 65-year-old male, living in New Jersey, would get some $3,500 a month for a $190,000 investment, for a total $210,740 over the five years.
If we choose to go this route, we would fund the annuity from a traditional IRA. The income would thus be federally taxable. It would, however, be eligible for New Jersey���s retirement-income exclusion���provided we don���t end up with too much income and go over the tax cliff.
The wild card in all this is my consulting income. I intend to continue to entertain opportunities. The downside: Any significant earned income could potentially push our state income over New Jersey���s tax cliff.
Another option we have: Tap our health savings accounts (HSAs) and our Roth IRAs. Any income we generate from these accounts won���t boost our taxable income. We plan to use our HSAs to pay our Medicare premiums. The upshot: We���ve decided that our 2023 income plan will look like this:
Traditional pension
Vicky���s Social Security
HSAs for Medicare premiums
Consulting income
Traditional IRA withdrawals
Roth IRA withdrawals
My analysis shows this plan should cover our core and discretionary expenses, and give us a chance to minimize our tax bill. If my consulting opportunities turn out to be more lucrative than I expect, or we win the lottery, our tax bill will be what it���ll be���and we���ll view it as a nice problem to have.
There���s an old saying in finance: ���Don���t let the tax tail wag the investment dog.��� This is usually interpreted as, ���Don���t make an investment solely based on tax considerations.��� I worry a little that I���m violating this tenet with our retirement income plan.
I believe that taxes are part of our civic duty and the price we pay for being financially successful. Still, I plan to track our income throughout the year, and I may make mid-year adjustments to try to minimize our tax bill.

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Good Enough
AT THE FIRST Berkshire Hathaway annual meeting I attended, Charlie Munger was explaining an investment that the company had made. He said it was likely to provide satisfactory returns.
At the time, that seemed like an odd statement. Satisfactory? Not great returns. Not market-beating results. Not returns of 10% or 15% per year. Not even market average performance. Just satisfactory.
Since that meeting, I���ve come to appreciate satisfactory returns. Satisfactory covers a wide range, everything from beating the performance of Treasury notes to bragging-around-the-office-coffee-pot returns.
It also allows me to keep holding my portfolio. For the past 30 years, I���ve had a significant small capitalization and foreign stock tilt. With U.S. large-cap stocks on a tear over the past decade, it���s been a tough period for a portfolio with such a tilt. Friends question my asset allocation���as well as my sanity.
I do believe that small-cap stocks will outperform over the long haul. I also think it���s better to pay less for future corporate earnings rather than more. Since most foreign stock markets have a lower price-earnings ratio than the U.S., I believe that performance across markets will converge. That could mean that foreign stocks soar or U.S. stocks struggle. It doesn���t matter to me. Either way, I���ll see some benefit from diversifying globally.
Unfortunately, we may not know if my convictions are correct for another three or four decades. Both small caps and foreign stocks have had long periods of underperformance. It could turn out that having these two tilts will look brilliant. Or it could look like a huge mistake.
Over the past decade, my portfolio has underperformed the S&P 500. But I���m okay continuing to hold it because the returns have been satisfactory. We���ve sent our children to college. We���ve retired on our own timeline. Life is good. I���m satisfied with satisfactory returns.
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Here for the Duration
BONDS ARE OFTEN SEEN as the safe harbor in a retiree���s portfolio. But that sure hasn���t been the case this year.
As the long era of easy monetary policy���one that dates back to 2008���has come to an end, bond owners have been handed hefty losses. With interest rates rising and the Federal Reserve tightening, many investors have come to understand the risks they run with bonds.
Was there a way to know the risk beforehand? Yes, using a measure called duration. Most investors know that when interest rates rise, bond prices fall, and vice versa. Duration tells us how much a bond���s price might rise or fall in response to a specific change in interest rates. A bond fund with a duration of seven years would lose 7% if interest rates rose by one percentage point. What if rates fell one percentage point? The fund would gain 7%.
When interest rates climb, a bond fund with a shorter duration will lose less than a longer-duration fund. Here���s an example: The Bloomberg Barclays Aggregate Bond Index currently has a duration of 6.2 years. It���s lost 18.5% in 2022 through Oct. 31, as interest rates have risen. Its close cousin, Bloomberg Barclays Intermediate Aggregate Bond Index, has a shorter duration���4.5 years. It���s lost less, down 13.9% year-to-date.
Duration measures how long it will take investors to recover their purchase price through the cash flows from a bond. Longer maturity bonds have a higher duration because it can take years longer for an investor to be repaid.
Analysts calculate duration from five pieces of data: years to maturity, current yield, face value, coupon rate and frequency of payments. Often, a mix of these factors is used. Fear not: You don���t need to know all the details. You just need to know the number to better understand an investment���s risk.
Investors should check back because duration can change over time. A bond���s duration can drop as the years pass and the bond draws closer to maturity. Duration can also shift a bit within a bond fund. For instance, an intermediate-term bond fund���s duration might drift as hundreds of individual bonds move into and out of the portfolio as the fund pursues its mandate to hold only intermediate-term securities.
Canny investors employ duration to amplify returns, in a way similar to using leverage to goose results. Holding long-duration bonds was beneficial for investors who built bond portfolios between 2008 and 2021, a period marked by generally declining and��ultra-low interest rates.
Now that rates are rising, however, the same aggressive portfolios are being whipsawed in ways investors might not have anticipated���unless they knew their duration. Unwary investors might be surprised to see their portfolio���s ���safe��� bonds down around 14%���in a year when the broad stock U.S. stock market is off 17%.
Duration isn���t limited to bonds. It can be calculated for stocks, though less precisely. Stocks don���t have the defined maturity or coupon rate of bonds, features that provide more certainty to bond returns.
Indeed, more assumptions drive stock durations. They���re often calculated using dividend rates and an assumed selling date. That last factor���the holding period assumption���is a critical bit of guesswork when calculating duration.
A simple measure of stock duration might calculate how many years it would take for the dividend payments to equal a stock���s current share price. From this, an investor could estimate how long it would take to be repaid for buying shares at today���s price.
Stock durations can vary hugely between growth and value stocks. Duration for value stocks is lower because mature, profitable value stocks often throw off strong dividend flows that would add up to the current share price relatively quickly.
When investors pay high prices for growth companies that may be unprofitable right now, they���re expecting those companies to earn enough later to support today���s higher valuations. Because those cash flows aren���t expected until well into the future, their duration is necessarily much higher. If those stocks also sell for high price-earnings (P/E) ratios, their durations may be extraordinarily high���a red flag for investors.
Sometimes, to support such nosebleed prices, the assumed holding period needs to be forever, or close to it. Think of pandemic-era favorites like electric truck maker Rivian, plant-based burger maker Beyond Meat and exercise equipment maker Peloton. Their incredibly high P/E ratios meant the stocks had extra-high durations. Sure enough, when interest rates began to rise, their share prices nosedived.
Every asset���s value is affected by interest rates. That���s why duration can be an investor���s ally���especially in an era where interest rates are no longer artificially suppressed by central banks worldwide.

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November 14, 2022
A Million Dreams
I DIDN'T WIN the Powerball lottery���this time.
That���s too bad because I knew exactly what I���d have done with the money. I���ll bet you did, too.
I was ready to pay for the education of all of our nieces��� children. ���Go where you wanna go,��� as the song says. My favorite charity would also have been on the list. Laurel House, a domestic violence agency, does tremendous work in Montgomery County, where we live in Southeastern Pennsylvania.
Lest you think I don���t have something personal in mind, there���s a condo in Florida that I���ve had my eye on. And another one in New York City, so I could attend a Broadway show at a moment���s notice.
All in my dreams, of course. Because I didn���t win���this time.
Which means I won���t be on the evening news. In Pennsylvania, you must fill out a claim form to get your prize. The state will reveal your name, the town or county where you live, and how much you���ve won.
Why does the state insist on this? It wants the public to know that you can indeed win, plus the more winners it publicizes, the more people play. Pennsylvania also has an open records law, which makes such information public.
With such a revelation, all my friends and neighbors would have known I was RICH. I may have discovered friends and family I didn���t even know about. How would I say ���no��� to them? More to the point, how do you decide when to say ���no��� in general?
Then there���s the whole issue of safety and scams. My lawyer friend said someone might have filed a bogus lawsuit against me or staged an accident, hoping I would pay up.
There are loopholes around the identity issue, such as forming a trust to claim the prize. Still, I suddenly see many disadvantages to having a lot of money.
So ends the fantasy. And the headaches.
I���m back to reality, living an anonymous and mostly contented life.
Till next time.
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