Jonathan Clements's Blog, page 178

Games Humans Play

IN A FEW MINUTES, I���ll be off to play a round of golf with friends I met after we moved to our condo in 2018.

Golf is a crazy game, insane actually. It���s immensely frustrating and yet has a way of providing devious incentives to keep you playing���like hitting that last good shot of the day after 75 lousy ones. Not unlike stock-picking.

This week, I shot a 39 on the first nine holes. I was headed for the best round of my life. My final score was 95. I simply couldn���t do anything right on the back nine.

I often imagine trying to explain golf to an alien visiting our planet.

Me: Well, we have this 1.68-inch ball���they used to be all white, but now they come in designer colors. The object of the game is to take this stick and hit the ball into a hole that���s 4.25 inches in diameter and 400 yards away.

Alien: That sounds hard. How many tries do you get?

Me: Four or five.

Alien: You have to be kidding.

Me: Yup, for most of us, it���s a real joke. It gets worse. Just for fun, they put lakes and big hazards filled with sand around the course. I���m convinced���but have no proof���that they also put magnets in the sand and water capable of attracting golf balls. By the way, each ball costs $3 to $4.

Alien: How do you get from one hole to another?

Me: If you���re smart, you walk. But if you���re like most of us, you ride in a cart���for an extra fee. And sometimes you do both because you can���t take the cart off the path and must walk to your ball, which invariably is on the opposite side of the fairway from the path. The last time I played golf, I walked 5�� miles���and I was using a cart.

Alien: What���s a fairway?

Me: It���s a big lawn going from where you hit the ball to the cup���I was going to say tee box, but that discussion would go on forever. Sometimes, it���s wide, sometimes not so much. The sides have trees and other stuff along the way.

Alien: So, all you have to do is hit a ball down the middle of a big lawn and then into a cup and you get four or five times to do that? Gee, that sounds easier than I initially thought���and boring.

Me: That���s what my wife says.

I then explained to my alien friend that they charge you for all this frustration, sometimes a lot of money. Most of us stick with a public course and pay $30 to $40 each time we play. But I have played private courses where the member initiation fee is $200,000, with annual dues of $25,000 to $40,000, plus a monthly dining fee���even if you don���t eat there. Now, that���s out of this world.

Alien: Where do you get those sticks?

Me: They���re called clubs, actually. Many stores sell them, online too, and you can have them custom made as well. The idea is to have clubs that match your age, height, swing and other things.

Alien: And that helps you play better?

Me: Yeah, sure, I wish.

Alien: Are they expensive?

Me: If you want them to be. I paid $1,100 for mine last year, plus $300 for the driver. They can cost less or a lot more. Mine were designed for older folks and were meant to improve my game. I should ask for my money back.

Alien: You said driver, where does it drive you?

Me: Into the woods mostly.

Alien: So, you humans amuse yourselves with a little ball, frustrating yourselves while spending lots of money to do so? How long does all this take?

Me: About four hours or so each time. Now that I said that outloud, it does sound crazy.

Alien: Does everyone play golf?

Me: Oh no, but we have lots of other games involving a ball. Hard ones, soft ones, funny-shaped ones, large and small. Sometimes, we hit them, throw them, even kick them or bounce them off our heads. It���s all quite popular.

Come to think about it, is there any logical way to explain what humans call sports? I hesitated to tell my alien friend that a third of Americans anticipate going into debt after splurging on tickets, gambling and other costs related to their favorite sports team.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.

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Heightened Interest

I TEND TO KEEP MORE cash than the average investor, so the recent rise in interest rates paid on savings has my attention. In fact, 2022���s pitiful performance by bonds has caused me to shift even more money into cash.

We have online savings accounts at CIT Bank, Synchrony, Marcus and American Express. CIT is currently paying 3.25%, Synchrony 3%, Marcus 3% and American Express 2.75%. The rates have climbed so frequently this year that they���ll probably be higher by the time you read this.

We also have cash stashed in Charles Schwab���s Value Advantage Fund (symbol: SWVXX) and Vanguard Group���s Cash Reserves Federal Money Market Fund (VMRXX). The Schwab fund pays 3.7% and the Vanguard fund 3.6%. These being money market mutual funds, rather than money market bank accounts, they don���t enjoy FDIC insurance protection. They also don���t guarantee a constant $1 share price, though instances of "breaking the buck" are extraordinarily rare.

I recently read of an online bank offering as high as 3.6%, but I���m sticking with my current lineup for now. I try to weigh the hassle and bookkeeping cost of a new account against the benefit of a slightly higher interest rate.

It takes a little doing, but once you get your accounts set up and linked to one another, it���s simple to transfer money back and forth as one bank or another raises its rates. I don���t go to the trouble of a transfer just to obtain a modestly higher rate. But with the recent frequent and significant increases, there���s often been enough of a difference to make it worthwhile.

Occasionally, a bank will pay extra to keep you from moving money out. Not long ago, I let a bank know of my intentions to shift my money and asked if it had any type of retention bonus to induce me to stay put. The bank did, which naturally it never advertises, and I got a modest bump in rates just for asking.

There can be other small incentives to look out for. Marcus Bank adds 0.1 percentage point to the interest rate if you���re an AARP member, raising its current rate to 3.1%. A while back, it offered a 0.5-percentage-point bump for three months to both you and the new customer, if you made a referral. Marcus even gave it to me for referring my wife.

In the past, we���ve also bought no-penalty certificates of deposit, which allow for early withdrawals without a loss of interest and often pay the highest rates of all. The downside is that every time the bank increases rates, you have to cash out the old CD to buy a new one. Banks typically don���t notify you that higher rates are available, so you need to check periodically. To find out if there���s a higher rate available usually requires a phone call.

This brings up a downside to online banking: There can sometimes be long wait times to get a human being on the phone. This has been exacerbated by the recent substantial rate increases, as people clamor to open accounts.

My suggestion: Before opening a new online account, call the customer service number and see how long it takes to get through. A fraction of a percentage point more on the rate isn���t worth growing old on hold.

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The Other Answer

THERE ARE USUALLY TWO answers to every personal-finance question: There���s what the calculator says���and then there���s how you feel about it. What does that mean in practice? Let���s look at an example.




Suppose you���re considering when to claim Social Security. Many retirees struggle with this question. On the one hand, the government offers a strong incentive to wait: For each year you forgo Social Security���up to age 70���your future benefit will grow by some 8%. That���s on top of inflation. But those who wait also pay a price. Each year that you delay is also a year during which you don���t receive benefits. Result: For those who delay claiming Social Security, it takes some number of years to break even on that decision.




Consider an individual who would be eligible for a benefit of $30,000 at age 67. To maximize his benefit, he could wait until 70. Then he���d receive $37,200���a substantial increase. But in the meantime, he���d be giving up three years of benefits totaling $90,000. How long would it take to break even? Putting aside inflation, the math is straightforward: Starting at age 70, he���d receive an extra $7,200 per year. To make up the $90,000 he earlier gave up would thus take about 12 years ($90,000 �� $7,200 = 12.5). To break even, he���d have to wait until age 82 or 83.




While 12 years might sound like a long time, this tradeoff still makes sense for a lot of people. Yes, 82 is only a few years less than the average U.S. life expectancy, which is age 84 for a 65-year-old man and age 87 for a 65-year-old woman. But that overlooks two factors: First, life expectancies��differ��dramatically among demographic groups. Education and profession are also key factors. As a result, your own life expectancy could easily exceed the average. Second, with Social Security,��spouses are entitled to a survivor���s benefit. So, the right way to look at life expectancy is to consider the chance that��either��you or your spouse will make it to that breakeven point.




For most people, then, it���s worth delaying to earn the largest possible check. That���s what the calculator says���but that���s not what most people do. Most happily claim Social Security earlier. Why? That���s where the second answer comes in: how they feel about it.




Some people claim earlier because they like the peace of mind of a guaranteed check from the government. Others do it because they worry they might fall short of that breakeven point. And then there are folks who believe they���ll come out ahead by investing the cash they receive when they claim early. All of these are entirely legitimate reasons, even if they run counter to what the calculator would say.




Social Security isn���t the only question with two answers. Many other personal finance questions do as well:




Should you make extra payments toward your mortgage?��The calculator says you shouldn���t, especially if you���ve locked in a low rate. If you have surplus cash, history says��you���d be better off investing those funds in the stock market���where returns have averaged 10% a year over time���than using it to pay down low-interest debt. Still, there are reasons to ignore the calculator: Stocks may have impressive historical performance, but they don���t go up every year. Also, there���s��the��peace��of��mind��gained from��living in��a home that���s fully paid for.




When should you cancel your term life insurance?��Are you retired and living off your portfolio? If so, the calculator would say it���s illogical to��keep��paying for life insurance. But many people still do. That���s mainly because no portfolio is guaranteed to maintain its value forever. The stock market might fall, or an unexpected expense���such as long-term care���could cause a retiree's investments to dwindle more quickly. To avoid that uncertainty, and to protect their families, some folks are happy to pay for insurance coverage beyond when it���s strictly necessary.






Should you choose an asset allocation that���s as aggressive as you can afford?��For many people, this makes perfect sense. Why be unnecessarily conservative?��But others see it in precisely the opposite way. Author William Bernstein offers this advice: ���When you���ve won the game, stop playing with the money you really need.��� In other words, don���t take on any more investment risk than necessary���even if it means, in theory, leaving potential��gains on the table.




Should you complete a Roth conversion while you���re still working?��Suppose you���re in a relatively high tax bracket���above 30%. If you do the math, you might find that, like most people, your tax bracket in retirement will likely be much lower. That would make a Roth conversion before retirement illogical. But some people still proceed with conversions at high rates. Why ignore the math? These folks worry that Congress might raise tax rates.��Even in the absence of that, they worry that a surviving spouse��would��end up in a higher tax bracket. Finally, they like the idea of leaving Roth IRAs to their children.




Should you buy a house that���s either bigger���or smaller���than what you can easily afford?��It might seem illogical to do either. But many people don���t care what the calculator says. Years of research on happiness say that money is best spent on experiences rather than things. While a house might seem like a ���thing,��� it also provides experiences. A bigger home��might allow you to��host family for��the holidays more easily,��or provide more room for kids to run around. A house that���s smaller than you can afford, on the other hand, could make you happy in a different way: Each time you walk through the front door, it���d be a reminder of how you���re building financial security.




Should you stick with index funds?��Burton Malkiel is a retired professor and author of��A Random Walk Down Wall Street. First published 50 years ago, Malkiel���s book was one of the first to argue against stock-picking and in favor of index funds���before index funds even existed. In his book, Malkiel��posited��that a blindfolded monkey throwing darts at the newspaper���s stock pages could outperform a professional investor. But in a recent��interview, Malkiel didn���t hide the fact that he enjoys picking stocks. Malkiel acknowledged that he has no special skill in this area. ���Do I think that I am making a bigger rate of return than through index funds? I���ve never calculated it,��� he says, ���but probably not.��� So why does he do it? ���Because it���s fun!���




In the world of personal finance, some debates seem never-ending. A reason for that, I think, is because people look at questions from different perspectives. Some believe that the calculator answer is the only legitimate answer to any question. Others disagree. Investment advisor Tim Maurer articulates this opposing point of view. ���Personal finance is more personal than finance,��� he says.




Ultimately, as you think through financial questions, I���d follow the lead of Burton Malkiel. While he enjoys picking stocks, he���s quick to add that ���it���s not very risky for me because I have a good strong retirement fund.��� And in that fund, there are no individual stocks; it's all��index funds.��In other words, you don���t want to��defy��the calculator. Certainly, don���t do anything you can���t afford. But as long as you��can��afford to do something, there���s no obligation to adhere to what the calculator says is optimal. Instead, optimize for contentment, peace of mind and enjoyment.

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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Rebuilding My Ladder

I DID IT AGAIN. I correctly identified a trend but jumped too soon.

When interest rates plummeted as the Federal Reserve reacted to COVID-19, I had a ladder of certificates of deposit. Some of these CDs are only now reaching maturity. Each step of the ladder yielded 2% to 3%. This looked good in comparison to the low rates available through most of the COVID period.

As the short-term CDs in the ladder matured, I deposited most of the proceeds in a high-yield savings account. Its interest rate had dropped as low as 0.5%, but I accepted that low return because I didn���t want to lock in low CD rates for the long run.

Not long ago, I wrote about using this money to partially rebuild my CD ladder. Rates were inching up and I thought a yield of just over 1% was worth locking in with a 13-month CD. After all, this was a better rate than what had been available during the past few years.

My first indication that I could do better came in a comment from a HumbleDollar reader, who asked why I would buy a CD when I could build a ladder of one- to three-year Treasurys yielding far more. An added bonus: Interest on Treasurys isn���t subject to state or local income taxes, raising their effective return.

The short answer is, I���d never before considered Treasurys as an investment option. I���d only just opened my first TreasuryDirect account a few months earlier to take advantage of Series I savings bonds, then paying an initial annualized rate of 9.62%.

The other factor: I didn���t appreciate just how fast interest rates would rise this year���or that the rates paid on Treasurys would rise considerably faster than bank CD rates. Banks are still not hungry for CD money, apparently.

After my false start with low-rate CDs, I started to rebuild my ladder for a second time. A ladder usually has two advantages: You get higher rates for investing in longer maturities and you get cash flow from the shorter-term investments as they mature.

To rebuild my ladder, I learned how to submit a purchase for a future auction on TreasuryDirect. The website is a little clunky, but���after a couple of transactions���I began to learn my way around. There are no transaction fees.

��I���ve made six purchases at auction so far, and two more are pending. I���ve already had one 13-week Treasury bill mature. When I bought it, the payment for the T-bill was electronically debited from my high-yield savings account after the auction. When the T-bill subsequently matured, the proceeds were electronically deposited back into the same account. There was no need for human interaction.

As interest rates rose, I was still stuck with two recently purchased CDs yielding around 1%. An online calculator showed me that, even after subtracting the early withdrawal penalty, cashing in the CDs made sense. I bit the bullet and redeemed the CDs to buy a new CD yielding 3.5%.

At the moment, short-term CDs have better yields than longer ones. Before COVID, I was buying four-year CDs for each step on my ladder. Now, my ladder is primarily made up of investments maturing in less than a year, and some as short as three months. I did reach out to bid for one two-year Treasury note. That���ll probably turn out to be another mistake. Live and learn.

At some point, long-term rates will once again exceed short-term rates by a meaningful amount. When that happens, I���ll lengthen the maturities of my Treasurys and CDs as my current T-bills mature.

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Read Before Jumping

WHEN MARKETS PLUNGE, investors start questioning whether they have the right mix of stocks, bonds and cash. That���s no great surprise: Bear markets hammer home the investment risks we���re taking���and many folks discover their portfolio is too aggressive for their taste.

That���s a useful insight for the future. But it's hardly one you want to act upon when, even after Thursday's rally, the broad stock market remains��down some 16% for the year-to-date and the bond market is off 14%. My advice: If you���ve learned in 2022 that your risk tolerance is far lower than you imagined, try mightily to hang tough until the stock and bond markets recover. To that end, you might ask yourself these five questions:

1. What���s my true net worth? As Austin Dorenkamp noted in his article earlier this week, our net worth includes not just our stocks and bonds, but also real estate, bank accounts, vehicles and more. When we look at the big picture, we may find that our portfolio losses in 2022 are relatively small���and not nearly so distressing.

2. How much do I have in bonds? Arguably, we should expand our definition of net worth, and include all the bond lookalikes in our financial life. I���m talking about things like current or expected Social Security payments, current or expected pension payments, and���most important for those still in the workforce���the value of our human capital, which is our income-earning ability.

It's tricky to put a value on these bond-like streams of income, but they are indeed enormously valuable. Add them to our net worth, and this year���s market losses will seem even smaller.

Feeling cheerier? Before we get too cheery, we need to look at the full picture, and that means subtracting our financial life���s negative bonds���the debts that we have, where we don't earn interest but rather pay it to others. A silver lining of today���s rampant inflation: These debts are now less of a burden in inflation-adjusted terms.

3. How much will I save in the years ahead? As I���ve argued before, we can think of future savings as part of our portfolio���s cash holdings���and that future cash makes our investment mix more conservative than it might otherwise seem.

Expect to save $150,000 between now and when you retire? Think of that as $150,000 in cash sitting in your portfolio and helping to soften today���s investment losses. An added bonus: Including future savings offers a quick-and-dirty way to factor our human capital into the value of our portfolio.

4. How much cash will I need from my portfolio over the next five years? Many folks, including me, advocate getting money that���ll be needed from a portfolio over the next five years out of stocks and riskier bonds, and into nothing more adventurous than short-term bonds. The rationale: While a bear market may drag on for longer than we���d like, we should see some sort of recovery before five years are up.

So, how much cash do you need from your portfolio over the next five years? If that money is already sitting in conservative investments, there���s no compelling financial reason to sell stocks or riskier bonds at today���s depressed prices.

5. What���s my time horizon? Yes, we might spend part of our savings over the next five years. But I suspect most readers have no intention of touching much of their portfolio for 10 years and probably longer���and that includes retirees.

Remember, while buying a home and putting a kid through college are financial goals with harsh deadlines, retirement is a different beast. We might spend down our nest egg over 30 years���and most of us aren���t aiming to get to zero by the time we shuffle off our mortal coil, because that would make our final years simply too nerve-racking.

Yes, this year���s investment losses have been painful. Yes, many folks now wish they had a less risky portfolio. But how many of us have such an immediate need for spending money that we���re compelled to sell at today���s prices? I strongly suspect there's hardly anybody in that camp.

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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Three Paths

I'M A BIG BELIEVER in retiring gradually, rather than declaring you���re done on a single retirement day. This lessens the change to your routine and your identity. One of the main appeals of a phased approach to retirement is that you can craft it to meet your needs. You may want to shift from fulltime work to part-time consulting, or perhaps lend your talents to a nonprofit or a startup.

To do that, you���ll need to figure out what you want, find the best fit for your interests and intended level of time commitment, craft a message about what you���re looking for���and then share that message with people who can help bring it to life.

You don���t need the perfect plan from the get-go, and you don���t have to spell out every area of interest you might want to explore.��Instead, you need a few key ideas that you can share with others and then refine them over time.

People are typically willing to help you if they can, but they aren���t going to figure it out or do the planning for you. You have to make your plan concrete and make it easier for others to assist you.

My suggestion: Tell your connections that you���re considering three different but related paths.��Using the ���three paths��� approach is an effective way to shape and share your interests, and get additional perspective.

For example, if you���re a seasoned professional trying to figure out what your phased retirement might look like, you could share the following during a networking discussion or casual coffee appointment: ���I���m considering three paths for my next chapter. I���m interested in a senior marketing role with a progressive company, either as an interim leader or consultant. I would also entertain joining a smaller firm or startup where I could really help make a difference from a marketing perspective. Finally, the third path would be to lead the marketing function for a nonprofit and then coach others there on marketing capabilities.���

Of course, you can change ���marketing��� to your area of specialty, and adapt the substance of the three paths to suit your experience and interests. The key: This approach should help you refine your message and your thinking. It allows you to focus on your desires, while also leaving open a variety of ways to realize them. Not only does this help you clarify your thoughts, but also it provides distinct ways for people to assist you:

They can help by providing their perspective through the questions they ask and the experiences they share. Each time you meet with someone, you get a chance to test and refine your message.
They can help by connecting you with others. In the scenario above, your contact may not know of any companies looking for an interim marketing leader, but he or she may be able to connect you with a leader at a startup.

The three-paths approach gives your connections three different ways to connect with your plan and to potentially help. You don���t have to tell anyone it���s your ���phased retirement plan.��� But you���ll know it is.

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Tell Your Story

NETFLIX ISSUED ITS third-quarter earnings report last month���and it was stellar. Just when everyone thought its growth was done, the streaming service added 2.4 million new subscribers. Quarterly revenue increased 5.9% year over year to $7.93 billion.

More important, cash from operations and free cash flow grew rapidly, up 261% and 14% respectively. For long-term investors, these are the metrics that matter most because they show the business is making money.

Netflix wanted us to know this, as well. During its earnings call, the company took a swing at the competition. Management said the company is earning between $5 billion and $6 billion a year in operating profit, while most of its streaming rivals are still losing money.

I give a lot of credit for Netflix���s success to two factors: the power of inertia and the power of storytelling. You can see inertia in Netflix���s enormous subscriber base, which is currently around 220 million worldwide.

Among the 137 million total households in North America, more than 53% subscribe to Netflix. But even that figure underestimates its dominance. After all, think about all the password sharing, where family and friends in different houses use one account. I wouldn���t be surprised if as many as 80% of North American households have access to Netflix, one way or another.

How does it keep so many users? Undoubtedly some people must think about dropping, but they don���t follow through. The answer to this stickiness���apart from the service���s addictive movies and TV shows���is inertia.

And it���s a global phenomenon. Netflix has more than 73 million subscribers in the U.S. and Canada, and nearly 73 million more in Europe, the Middle East and Africa. There are 39 million subscribers in Latin America, plus another 35 million in the Asia-Pacific region.

According to Isaac Newton���s first law of motion, an object in motion will tend to remain in motion unless acted upon by a larger force. And an object at rest will remain at rest unless acted upon by a larger force. The Netflix subscriber base seems completely at rest, happy to curl up on the sofa and binge-watch from the safe confines of home.

As an engineer, I also see inertia playing an outsized role in other, larger ways. It���s easy to allow our day-to-day lives to stay the same. Why make changes if things are generally okay? This leave-it-alone behavior can lead to poor outcomes. Just consider the possible effects on our finances:

We stay in debt because we can just keep making the minimum monthly payments.
We don���t save because we have a job that pays our bills.
We take ever more investment risk as stock values go up, failing to rebalance and leaving ourselves vulnerable to a big market decline.
We stay in jobs we hate because it���s just easier than searching for something better.
We don't take training courses or certifications to improve ourselves because our career is in a decent spot.

The problem with this ���if it ain���t broke, don���t fix it��� approach is that things regularly go wrong in life. The question isn���t ���if��� something will break, but rather ���when.���

How can we free ourselves from inertia���s hold and avoid leaving ourselves financially vulnerable? We should act less satisfied and instead follow this advice from Morgan Housel, author of The Psychology of Money: "Aim to be financially unbreakable: be able to stick out swings in the market and stay in the game long enough for compounding to work its magic." In other words, we should create a financial fortress to withstand the storms that will eventually come our way.

When offering such advice to others, I���ve tried to use logic. If I presented a good enough argument, I thought, those listening to my reasoning would change their mind and do what���s best. This turned out to be mostly a myth.

I���d forgotten about the powerful force that made me change. It wasn���t logic and reasoning, but rather storytelling���the other great Netflix strength. The financial stories that influenced me could have been about what happened to me or to other people I knew, but they���ve had a greater impact on my behavior than any number of quarterly reports or stock charts.

This post is nothing more than my ask, and perhaps even a plea, that more people share their financial stories. Money is seen as a taboo topic���but I see that as a crucial failure by us humans.

Throughout history, the way we���ve learned is by word of mouth, through stories that are shared down the generations. But when it comes to this one subject that affects every part of our life, we���ve decided it should never be spoken about���at least not with the personal details that make stories powerful. By choosing to be silent, we help perpetuate a cycle of money failure that drags down a large portion of the population.

I implore everyone who reads this: We are the finance nerds in our social circles, and we need to share our stories with friends and family. You might think to yourself, ���I don���t have everything figured out. Who am I to give advice?��� But that���s an even better perspective, because it means you can relate to others much better than a trained financial expert. For instance, every single item in the bulleted list above is either something that I���m dealing with now or have dealt with recently.

When given the opportunity, please speak up, because we know the financial stories that can overcome inertia���and thereby put people on a better life path.

Kelechi Iwuaba is an engineer, a Nigerian-American and a self-taught finance nerd who lives in Atlanta. He loves talking about all things finance to anyone willing to listen. In his free time, Kelechi creates finance videos, records the ���Rambling Mind��� podcast and writes a blog. He loves volunteering at his local church and playing soccer at every opportunity. Follow him on Twitter @KelechIwuaba. Kelechi's��previous articles were That First Step and��Once Upon a Dime.

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Actively Subtracting

A NEW RESEARCH report confirms that there are darn few reasons to consider an actively managed fund over an index fund���and, indeed, this year���s bear market has made the case for active funds even weaker.

Remember active fund managers, those stars of TV and magazines in days of yore? Purportedly, they could beat their relevant indexes by buying the best-performing stocks and bonds, shifting sector and country weights, and sidestepping market pitfalls. That notion seems almost quaint today���because it���s been proved so thoroughly and repeatedly wrong. Almost no one can consistently beat the market, except by luck.

That said, the semiannual Morningstar Active/Passive��Barometer had highlighted a handful of fund categories���out of 20 that the Chicago research firm tracks���where more than half of the lowest-cost active funds had gone on to beat the average of index funds over various time periods. In some cases, three-quarters or more of the lowest-cost active funds���those with expense ratios in the bottom 20% of their category���had beaten the index funds over 10-year periods.

The data include funds that have folded or merged, so there���s no survivorship bias. Sound promising? Trouble is, like so much investment information, it���s based on historical market conditions that might not be repeated.

Therein lies the rub. When compared to its previous report with results through Dec. 31, 2021, Morningstar���s latest barometer���with data through June 30���shows noticeably lower 10-year success rates for those fund categories where active managers had earlier prevailed. One reason for the setback: Many active managers try to beat the indexes by taking on more risk, and that���s hurt during this year���s bear market.

In the accompanying chart, you'll find the five categories with favorable success rates for the lowest-cost active funds over the 10 years ended Dec. 31, 2021, plus their 10-year success rates as of June 30.

You���ll notice the list doesn���t include any categories where active managers ply the U.S. stock market. They���ve been the least likely to succeed over both 10-year periods.

���The two keys for passive investing are the efficiency of the underlying markets and the cost of the fund,��� Bryan Armour, Morningstar���s director of passive strategies research for North America, told me. ���High-yield bonds and emerging markets work [for active managers] because there���s not as much clear information embedded in the prices of the underlying bonds or emerging market stocks.���

Yet, as the new data suggest, whatever enabled some actively managed funds to outperform in the past may not persist in the future. What looked like a lay-up six months ago for foreign small-mid blend funds and for diversified emerging markets funds now looks more like a toss-up. The active manager success rate in the high-yield bond category has also fallen sharply.

Also keep in mind that foreign small-mid blend funds and European stock funds are the categories with the smallest data sets. In each case, fewer than a dozen active funds existed 10 years ago. The upshot: Morningstar���s Armour said the sample size is too small to draw conclusions, especially when sliced into quintiles by expense ratio.

What about that much-touted ability to sidestep landmines? Most active managers certainly didn���t scamper to safety before Vladimir Putin blew up the Russian stock market with his Feb. 24 full-scale invasion of Ukraine. You didn���t need to predict the war to see Putin���s Russia as a��poor place��to invest, but no doubt some stock pickers were lured by rock-bottom valuations.

���It wasn���t like [most] active managers were able to navigate that,��� Armour said. ���Some active managers were actually way longer Russia than our category and the indexes, and they didn���t get out ahead.���

I���m not optimistic about the odds of active management consistently outperforming in emerging markets. But it is an area in which I refuse for now to adopt a strictly market-cap indexing approach. As I���ve written before, I want to limit my��exposure��to China. That's why I own Freedom��100 Emerging Markets ETF, which doesn���t invest in autocratic countries.

As a rule, I avoid the risk of high-yield ���junk��� bonds. Were I to venture there, I might consider a low-cost actively managed fund. The Morningstar numbers suggest that���s an area where there���s at least some hope for active management.

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

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Know Your Worth

WHAT'S MY NET WORTH? Do I know? Should I know?

These are questions I���ve thought about long and hard. After tracking the combined net worth of my wife and me for the past five years, I���ve concluded that the answer to that third question���should I know?���is a resounding yes. Before we get to the reasons, let���s start with a few basics.

What is net worth? According to Wikipedia, net worth is ���the value of all the nonfinancial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities.��� Put another way, your net worth is how much money you would have left if everything you own, financial and physical, was sold and used to pay off all the debts you owe.

Net worth might sound a bit contrived. After all, it doesn���t tell you if you have enough money in your checking account to pay this month���s rent or credit card bill. Its real value is to provide a single, clear measure of your financial health at any moment, as well as over time.

Why track net worth? First, it provides a simple, summarized view of our entire financial situation. My wife and I have four bank accounts, two vehicles, five retirement accounts, a primary home with a mortgage, and two rental properties with mortgages. If I look at each of those categories individually, it doesn���t provide me with a sense of how we���re doing overall.

Second, if one of those areas is doing particularly well or poorly, I can easily get a distorted feeling about our financial condition. If I look at our net worth, I get an accurate, if simplified, snapshot of our standing.

Third, it helps me better understand the effect of our financial choices. For me, this was especially important when it came to paying off debt.

In the past, paying down car loans, credit cards or our mortgage didn���t excite me as much as saving money in a retirement account. Perhaps it was because debt payments made the subtracting number smaller, but saving made our account values larger���and that���s the number I tend to focus on. Viewed in terms of net worth, however, paying down debt increased our total value just as effectively as savings could.

How do I calculate net worth? First, identify the broad categories that comprise your financial and physical assets. I use five main categories: bank accounts, retirement accounts, vehicles, real estate and miscellaneous.

Second, list all assets and debts for each category. For example, under retirement accounts, I list out our 401(k)s, Roth IRAs and health savings accounts. Under vehicles, I list each vehicle we own and any outstanding loans on them. Under real estate, I list each property we own, along with each mortgage we have. Finally, under miscellaneous, I list things like student loans and vested stock units from my employer.

Third, record the value of each item listed. For bank accounts, retirement accounts and debts, just look up your balance or amount outstanding. For nonfinancial assets, you can get free estimates from websites like Kelley Blue Book for vehicles and Zillow for real estate.

Fourth, add up the value of all the assets and subtract the debts and���bingo���you���ve calculated your net worth.

A few additional tips. You might be tempted to include personal household possessions like jewelry, furniture and appliances. Unless your grandma left you a particularly valuable piece of jewelry that you���d consider selling, I���d leave personal household possessions out. They���re hard to sell and might not fetch much anyway.

Some experts take this even further, advising that you exclude your primary residence and your car, while still figuring in the debts associated with these assets. The rationale: It would be tough to live without a home and a car, so they aren���t readily sellable, but you���re still on the hook for the associated debt.

I recommend calculating your net worth once a year. It doesn���t matter when as long as you���re consistent. I look forward to the tradition of calculating our net worth every Jan. 1.

Once you have a few years��� worth of data, you can easily plot a chart showing your change in net worth over time. You���ll immediately see what sort of financial trajectory you���re on.

My advice: Use your net worth to bolster your spirits during tough times. It���s been painful to watch our retirement accounts fall this year. I take solace in knowing that our higher property values, steady mortgage payments and aggressive saving have helped counteract those losses.

Our net worth has increased year over year, although by a much smaller amount than before. It���s little wins like this that can help you stay the course during life���s financial storms.

Austin Dorenkamp wears many hats including software engineer, program manager, landlord, husband and therapy dog handler. He���s even been called an ice cream sommelier. If he���s not giving those around him unsolicited financial advice, Austin���s likely cracking a joke or driving in a time-efficient manner. His previous article was�� Just �� Another Car .

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Motivated by Money

"WE BEHAVE BETTER when we know others are watching���so be sure to tell friends if you���re aiming to exercise more, lose weight or save more." I love the pithy sayings that appear each day at the top of HumbleDollar���s homepage. This statement appeared Oct. 19.

A few years ago, when I was still working fulltime, some colleagues and I adopted this philosophy. Suppose one of us had a goal, such as losing five pounds by the end of the month. We could have simply told our coworkers the goal. But being type-A personalities, we took it to an extreme. We decided it was more effective if we backed our intentions with money. ���If I don���t lose five pounds by the end of the month, I���ll give you $20.���

None of us really wanted to take a colleague���s money, so we soon changed this to, ���If I don���t reach my goal, I���ll give $20 to a charity of your choice.��� This led to some interesting discussions. If we were of the same political party, had the same views on abortion or shared the same religion, the penalty for not meeting the goal was to give a contribution to an organization we both supported.

That wasn���t much of a penalty. Someone pointed out it would be more motivating if the loser had to make a financial contribution to an organization with which he or she disagreed. If we were a staunch member of one political party and we lost our bet, we had to give $100 to the other major party. Now, that was motivating.

Maybe we were exceedingly cheap, but the person always met his or her goal. I don���t recall anyone ever paying a penalty. Of course, we were on the honor system. The person making the contract simply self-reported at the end of the month.

In January, my wife and I are going to Israel for three weeks. In preparation, this fall we���re both taking two college courses: Old Testament Survey and New Testament Survey. I also decided it was time that I read every book in the Bible. I won���t get that done by January. There are 66 books in the Bible, with a total of nearly 1,200 chapters. If I read seven chapters a day, or about 200 chapters per month, it would take six months. For me, that���s a reasonable goal. After I complete each chapter, I summarize the main points of that chapter. When I finish a book, I also write a summary of the whole book and its major themes. This helps my retention.

One of my former colleagues now lives in Northern Ireland. When I told him what I was doing, he immediately said that if I don���t have this done within one year, I owed him $1,000. I accepted his ���offer��� but also told him not to plan on getting the money. With that penalty hanging over my head, I know I���ll meet my goal.

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