Jonathan Clements's Blog, page 188

Get Rich Slow

THE FINANCIAL WORLD generates a lot of noise. As a financial planner, I see that every day. Being in my 20s, it���s fun to learn about new alternative investments or imagine getting rich quick thanks to one stock or following the advice of one social media post.

But I know that���s all it is���fun. Instead of imagining my way to wealth, I take control of my finances by creating rules to live by. Rules are driven by values. I know my financial rules may change as my life progresses, but I suspect my values will stay the same. Here are three of my money values, and the current rules I���m following in an effort to adhere to them.

1. Focus on one thing at a time.

Building on this principle, my big focus right now is investing in myself. I���ve spent a lot of time and money educating myself on financial planning, while also striving to gain work experience.

Social media and the financial news have glamorized side hustles, passive income and multiple income streams. But creating passive income takes time and an investment of money. Meanwhile, side hustles can mean spreading yourself too thin and focusing on too many different skills. The phrase that comes to mind is ���jack of all trades, master of none.���

I���m focusing on becoming a master first. The biggest asset for a young professional like me is the ability to earn active income. I���m focusing my time and attention on creating one large income stream���that delivered by my fulltime work.

2. Control what you can.

I can���t control what happens to the stock market. Stocks are glamorized and often depicted as the primary path to wealth. I disagree, especially for those of us who are at the beginning of our savings journey.

My first rule is to prioritize my financial foundation. To me, that means having a stable income and an emergency fund. With those two buffers in place, I shouldn���t have to tap my longer-term investments during rough markets���and my finances won���t live or die based on uncontrollable stock market performance.

Second, I focus on how much I���m saving, which is more important for me today than my investment performance. At some point, I expect the pendulum to swing, and my investments will make more than the amount I���m able to save each year. Until then, the amount I���m contributing each month to my portfolio will have a bigger impact on my financial foundation.

I���m humble enough to know I can���t beat the market or control my investment performance. I don���t pick individual stocks, thereby saving time and avoiding hassles. Instead, I invest in a few exchange-traded index funds that give me exposure to the broad stock market.

3. Personal finance isn���t all math.

A key benefit of building a strong foundation is that it relieves much financial stress. Amid market downturns and economic turmoil, it feels good knowing I have cash that I can fall back on. That peace of mind is worth far more than the market returns I���m giving up by keeping a chunk of my money in cash investments.

I also make financial flexibility a priority. Investment projections show I���d be better served by putting all my savings into retirement accounts, such as a Roth IRA or 401(k). But at my age, I couldn���t touch most of that money for another 30-plus years.

I���d much rather give up today���s tax benefits to have easier access to my money if, say, I want to start another business or buy a house. Who I am today probably won���t be the same as who I���ll be in the future, and I want the ability to adjust my finances accordingly.

Finally, I don���t believe in getting rich quick. That���s a strategy based on hope and it���s doomed to fail. There is an abundance of financial ���opportunities��� competing for my attention and insisting I���ll be left behind if I don���t get in right now. But I���m not biting. I���ll continue to follow my rules, learn a little bit more each day and trust in the process of getting rich slowly.

Logan Murray is a solo��financial advisor. His company�� Pocket Project ��offers��subscription-based financial planning services to young professionals. For more financial insights, read Logan���s�� blog ,��connect with him on�� LinkedIn ��and check out��his earlier articles.

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Lunch Money

WE ALL HAVE GOOD habits and bad habits. One of my best habits: bringing my lunch to work.

I save both money and calories by brown-bagging it rather than buying lunch at a restaurant. My lunch of leftovers, along with a few pieces of fruit and a bottle of water, cost less than even a fast-food meal deal, and it���s healthier. What about the long-term savings from avoiding those additional calories? Researchers have found that excess body weight adds thousands of dollars to our annual health care expenses.

My meals at home are also reasonably healthy, mostly lean meats and fresh vegetables. The leftovers find their way into my lunchbox the next morning. A typical midday meal for me is two to three ounces of meat, one cup of steamed vegetables and two or three pieces of in-season fruit. The cost is less than $3.

By contrast, a McDonald���s Big Mac combo meal runs to more than $8. A Chipotle grilled chicken burrito with rice, black beans and a drink is $11 to $12. Lunch at LongHorn Steakhouse starts at $8.

The calorie count for my lunch is also lower. The total usually runs about 400. By contrast, the Big Mac combo boasts 1,080 calories, the Chipotle meal can total around 820, and a LongHorn crispy chicken combo has 1,200 calories if you choose a salad and diet drink.

Those extra calories don���t automatically mean extra weight. But experience tells me that fast food lunches and a few restaurant dinners add pounds to my frame. Toss in a latte, instead of my preferred home-brewed black coffee at breakfast, and I could be headed toward a body mass index, or BMI, that���s dangerous to my health and my wallet.

BMI is a measure of total body fat calculated from the height and weight of adult men and women. The higher the number, the more body fat a person is carrying around. An individual with normal weight has a BMI between 18.5 and 25.

Researchers from Harvard and George Washington University, drawing on data from 2011-16, estimate that a moderately obese person with a BMI of 30 to 35 spends about $1,800 more on health care each year than a person of normal body weight. Someone with a BMI over 35 can spend more than $3,000 extra.

If bringing lunch to work is one of my good habits, what are my bad habits? Wow, is that the time? Got to go.

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The Winner’s Curse

I RECENTLY LEFT A BID for a set of old, dusty chairs at a country auction. The next morning when I called the auctioneer, he told me I was the high bidder and the chairs��� new owner. As an economist, I immediately thought, ���Wait���am I the winner or the loser here?���

The auction was held at the Elks Lodge in Rockland, Maine, where old furniture tends to go for a song. I had been drawn there by a picture of six Chippendale��dining chairs supposedly made in Philadelphia in the 18th century. Considered the apex of American furniture design, originals are hard to find and ridiculously expensive on eBay.

When I looked the chairs over before the auction, I noticed through tenons, which do indeed indicate a Philadelphia origin. The side rails of the seats are slotted completely through the rear legs, which makes these chairs as sturdy as ���wooden tanks,��� according to one furniture expert. These particular chairs were plainer than the fancy examples you���ll find in museums, with shell carvings and claw feet. They may have been made for Quakers, who generally wanted the best quality but without any ostentation.

The chair seats were high and comfortable. People were much smaller then, so this is rare in an old chair. I was considering a bid but one thing held me back���the winner's curse. That���s the title of a well-known economic study that found that winners at an auction usually pay too much.

The winner���s curse works this way: There���s a rational, objective value to any good, but opinions of worth will differ even among experts. Some will value a good too low and others too high. At an auction where there are several bidders, the expert with the high estimate will win and tend to overpay.

The winner���s curse was first observed with off-shore oil leases in the Gulf of Mexico, where winning firms paid millions more for drilling rights than the value of the energy subsequently recovered. The curse is still very much alive today. You can see it in takeover battles for billion-dollar companies and in the bidding war for the 1960s split-level down the street.

My biggest risk in bidding for the six chairs: They turned out to be reproductions. I needed to turn furniture detective. I���ll spare you all the details except for this telling clue: The wood underneath the seats was roughhewn and gouged. Old-time chair joiners were busy men who didn���t waste time finishing the parts that didn���t show. The inside wood on reproductions is usually as smooth as silk.

Seeing me turn over a chair, the auctioneer called me over to show me an appraisal given to him by the current owners. The letter stated that the chairs were made in Philadelphia around 1775. The appraiser had valued the set at $7,500 in 1984. I decided to bid.

In economics, if you want to avoid the winner���s curse, you���re advised to bid lower than your first instinct. The auctioneer���s estimate was the chairs would sell for between $2,000 and $3,000. Last summer, I paid around $225 apiece for new plastic Adirondack chairs. They���d come flat-packed and I���d assembled them myself���with a few choice words. I decided I should be willing to bid a little more for chairs made of solid mahogany than I���d paid for the plastic jobs from Costco.

I couldn���t attend the auction in person, and it wasn���t online. That meant I had to leave one bid���the highest price I was willing to pay. I left a bid of $1,400 for the set. Any check I write with a comma in it causes me anxiety, and this was as big a bid as I���d ever made���aside from bidding on a house. With sales tax and the auctioneer���s 15% commission tacked on, each chair ended up costing me $283.

The next morning, after I brought them home, I wiped them down outside. In the bright sunlight, I noticed for the first time that the chairs��� legs had been lengthened sometime after they were made, which is why they sat so satisfyingly high. That meant I didn���t have an Antiques Roadshow discovery on my hands. Top collectors want things as unchanged as possible.

Did I overpay? It���s a possibility. Canny Maine antique dealers attend all these auctions and will snap up bargains. The fact that I won suggests that I paid at least fair value���for a Maine country auction. Did I mention the seats could do with a recovering? I could feel the tingle of buyer���s remorse in my gut.

Fortunately, just then my wife got home and said she loved the chairs��� mellow old glow and beautifully carved crest rails. That���s the most important test of value in our household. We���ll take them home to Pennsylvania and use them in our dining room, just as was intended when they were built some 250 years ago���for Ben Franklin, no doubt.

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

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A Senior Moment

I HAVE A MILESTONE birthday this month���turning age 65. This has long been considered the standard retirement age.

When the Social Security Act was signed into law in 1935, 65 was the age at which workers could receive retirement benefits. Many companies��� defined benefit pension plans still use 65 as the age at which employees can receive an unreduced pension. And 65 is the age at which folks become eligible for Medicare.

This is also the median age at which workers expect to retire, according to the Employee Benefit Research Institute. Its annual survey, however, regularly finds that workers��� expectations don���t match reality: The median retirement age is, in fact, 62.

Why do so many workers end up retiring earlier than they expected? Some are forced into early retirement by ill-health. Sometimes, their job disappears. The pandemic is also cited as the reason so many have lately opted to retire. I feel like I���ve had a front row seat from which to observe these changes in the work world and also our changing conception of retirement.

During my final years in the workforce, I saw a trend toward hiring younger workers. In some ways, this made sense. We were a technology-driven firm, and young software engineers became a bigger part of the company���s workforce. The government systems we worked on had also matured, and the company didn���t need as many senior engineers to maintain and enhance those systems. I spent my last few years in the workforce winding down a major systems engineering program. Fifty employees had to be let go. Many found other jobs, but some decided to start retirement, albeit a bit earlier than they had planned.

That was a few years before the pandemic, which has further transformed the work and retirement landscape. It seems many older workers decided they���d had enough and were ready for something else.

While the retirement age was set at 65 when Social Security was created, that changed with legislation passed in 1983. In the years since, the full retirement age has gradually climbed. For instance, for anyone born in 1960 or later, the full retirement age is now 67.

This gradual rise in the full Social Security retirement age has changed retiree behavior. Among those signing up for benefits in 2005, 54% of women and 50% of men were age 62, the earliest possible age. But by 2018, those figures had fallen to 31% for women and 27% for men. It seems retirees are heeding the message that claiming early means a permanent reduction in their monthly government check.

Folks are also approaching retirement differently. Last year, my wife did what workers have traditionally done���go cold turkey. Quitting her job was a great decision for her, and she says she���s never felt such peace of mind. But I���ve taken a more gradual approach, moving from fulltime employment to part-time gigs as a way to ease the transition and keep some income coming in. This has, for me, made the shift to retirement much easier to cope with.

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Hitting the Road

MY WIFE AND I JUST returned from the first extended road trip of our retirement. We were away two weeks, drove 2,800 miles and visited 10 states. The primary reason for the trip was to stay five days on a houseboat on Beaver Lake, Arkansas, with seven friends.

We broke the trip into three phases. The first part took us from New Jersey to northwest Arkansas in two-and-a-half days. Along the way, we stopped in St. Louis to visit the Gateway Arch��National Park. We also drove a short distance along legendary Route 66 in Missouri. It wasn���t a very exciting section of the historic 2,448-mile highway. Next time, I���d like to traverse some of the more celebrated sections, especially a special corner of Winslow, Arizona.

Phase No. 2 was five days and nights on an 80-foot houseboat on Beaver Lake. We fished, swam, paddled, grilled, read, played games and enjoyed each other���s company. Seven of the nine passengers are retired or about to retire. Two of our friends are still actively working but looking forward to retirement. There were lots of discussions about travel destinations, Medicare and retirement locations.

The third phase consisted of a semi-leisurely drive through Memphis, Nashville and three places in North Carolina���Asheville, Winston-Salem and Raleigh. In Memphis, we toured Graceland, ate some good barbecue and heard terrific music on Beale Street. A special place in Memphis is the National Civil Rights Museum. The museum is located at the Lorraine Motel, where Dr. Martin Luther King was shot. It���s quite sobering and educational, and well worth the time.

In Nashville, we hit some of the honky-tonks���Kid Rock���s and Jason Aldean���s���and had dinner with our nephew. Meanwhile, in Asheville, we hiked some of the Blue Ridge Parkway and strolled the city���s River Arts District with another nephew. We didn���t tour the historic��Biltmore Estate on this trip but plan to return to the region and explore it, along with the Great Smoky Mountains National Park.

For the remainder of the trip, we visited family. It was great to catch up with brothers, in-laws, nieces, nephews, and great-nieces and nephews. Several of my wife���s brothers had purchased homes during the pandemic, and it was fun to finally see their new places.

With some planning, we were able to keep our travel costs to a reasonable level. We used Marriott points to cover most of the hotel stays. Our total gas bill was around $400. Gasoline prices in the Midwest and South were less than $4 per gallon. We paid $3.19 in Tennessee.

Food costs were a mixed bag. We planned well for the boat trip by shopping at Costco before we left. We transported a 40-pound cube of frozen protein from New Jersey to Arkansas, which included salmon, chicken, steaks, lamb chops and other perishables. For the drive, we bought healthy foods, and snacked or picnicked along the way.

Restaurant prices around the country seemed to have all risen in concert. As part of our weight-loss efforts in 2022, we���re learning to make smarter and healthier choices when dining out. Sharing an entree and a salad helped our wallet and our waistline.

There was one restaurant that was a real bargain���Moose Caf�� in South Asheville. For about $10, you got coffee, freshly baked biscuits with apple butter, a three-egg omelet loaded with your choice of fixings, and grits or hash browns. We turned down the carbohydrates, but they brought them anyway. The total bill was under $20. It���s nice to know such places still exist.

One theme we heard about throughout our trip was the noticeable migration to southeastern states. SmartAsset recently published an article that noted that high-earning households are migrating predominantly to Sun Belt states. The article���s findings meshed with the anecdotal stories we heard along the way.

North Carolina, South Carolina and Tennessee are receiving a large influx of households from higher-tax northern states like New York, Pennsylvania and New Jersey. The shift was detectable in the ubiquitous construction we saw in Nashville and elsewhere.

The majority of my wife���s siblings and their children now live in North Carolina. Several moved from the Philadelphia region to be closer to children and grandchildren. Our friends who own the houseboat are actively considering where they might retire. Their primary home in Wichita, Kansas, is a five-hour drive from Beaver Lake. For many of us, planning where to retire is as important as saving for retirement.

The other overwhelming takeaway from our trip is obvious, but still profound: If travel is important to you, do it while you can. All of our boatmates strongly agreed with this. Family members we visited later in the trip also heartily echoed this advice. One lamented that she���d started slowing down when she reached age 70.

My wife and I have spent this year working on our health and fitness. This paid off nicely. On the trip, we were able to enjoy ourselves more, be more active and were generally more comfortable driving long distances. After two weeks on the road, we were pleasantly surprised that we weren���t exhausted and dying to get home to the Jersey shore.

There are several more places remaining on our bucket list. These include Alaska, the Rockies, and much of Europe and Canada. When I was drawing up our initial retirement budget, I included what I thought was a generous $2,000 per month for travel costs. We may exceed that over the next five years, but I���m okay with that. My advice to other retirees: Hit the road while you can.

Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.

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Hear, Hear

I TURNED 70 THIS YEAR, and decided to finally do something about the hearing loss I���ve experienced over the past few years. In other words, get hearing aids.

I asked my older sister for advice. She told me she ended up spending $4,000 to $5,000 for her hearing aids a few years ago. She also said she wishes she���d asked her friends for advice first.

My sister doesn���t consider herself wealthy but has a few friends who are. She told me that, when she later asked these well-appointed ladies where they���d gotten their hearing aids, they replied���to a woman��� ���Oh, my dear, Costco is the only way to go.���

With this advice, Costco was on my radar, but I wanted to explore the alternatives first. After plenty of online reading and YouTube watching, I became interested in Eargo. It was an attractive option���tiny and discreet in-the-ear aids with rechargeable batteries. The company also has the best hearing aid commercial ever.

I���ll concede that I was put off by the fact that it had paid $34 million in April to settle a Department of Justice��investigation, which also had quite a negative effect on the company���s stock. Things have gotten worse since. As I write this, the shares are trading below $2.

Nevertheless, I decided to give Eargo a try. I should mention that every hearing aid manufacturer or retailer I explored offered a ���no questions asked��� return policy, and Eargo was no exception.

Eargo is an all-remote operation. You take an initial hearing test online, place your order online, take delivery by mail, and follow up with phone or video sessions. I found the process easy and convenient, and was even able to negotiate a bit. I got a pair of its top-of-the-line model at a better-than-advertised price.

Unfortunately, the Eargos I received by mail didn���t fit well in my ear canals. In addition, despite the initial hearing tests indicating I was a good candidate, my hearing loss in one ear was too great for the Eargo aid to remedy.

I next decided to explore the program offered by my Medicare supplement policy with Mutual of Omaha. The insurer is affiliated with a group called Amplifon, which in turn referred me to a traditional, full-service hearing aid center in my area.

I made an appointment, went in for a hearing test, and then heard a brief pitch for its recommended hearing aids. The quotes per pair were $4,000 to $5,000, even with the ���special��� price I was getting through Mutual of Omaha. The budget shopper in me flinched at that, so I decided to finally check out Costco.

First, I had to join Costco, which costs $60 a year for my wife and me. Next, I made an appointment for an in-person exam at the Costco store. On the appointment date, my wife and I made the fairly long drive and I went through a test and evaluation���the most thorough to date.

I was impressed with the tech, who was knowledgeable and patient with my many questions���and is not paid on commission, as Costco likes to point out. The retailer���s biggest seller is the house brand Kirkland 10.0 hearing aids, which sell for $1,399.99 a pair and are manufactured by Sonova, a Swiss company and one of the leading hearing aid manufacturers.

Similar models, sold under Sonova���s Phonak brand, cost thousands more, which is clearly one of the biggest selling points for the Costco models. While Costco is also happy to sell you other brands, and at higher prices, the Kirkland aids had all the features I wanted, and had great online reviews as well. I should also note that hearing aids are a qualified��medical expense if you have a health savings account.

I placed my order that day and returned a couple of weeks later when my hearing aids had come in. They���d been calibrated by the tech according to my exam results. The fitting went well, and I knew right away these were probably going to work for me.

I went back again in two weeks for a follow-up appointment where the tech answered more questions and made an additional small tweak. A month later, I had a remote appointment through an app installed on my iPhone, which also allowed the tech to make another small adjustment.

There were no additional charges for all these appointments. As long as I keep my Costco membership current, I can schedule additional free appointments as often as needed, even if it���s for something as simple as having a complete cleaning done.

So far at least, I���ve had a great experience with Costco. I now can see why it���s so popular when it comes to hearing aids. Of course, there���s one other plus���or maybe it���s a negative. Every time we make a trip to Costco for an appointment, we leave the store with a few other ���must haves��� in our shopping cart.

Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dogs, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They're also blessed with five beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier��articles.

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Give It Time

WHILE THE S&P 500���s price-earnings (P/E) ratio has little predictive power if you look at returns over the next 12 months, it���s more important if you stretch out your time horizon to five years and beyond. What you pay has a significant impact on your likely long-run return���and that should be comforting for today���s buyers.

Recently, WisdomTree Global Chief Investment Officer Jeremy Schwartz shared a compelling graphic showing P/E ratios for dozens of U.S. and foreign stock market sectors. Whether you look at broad market segments or only at value stocks, it���s hard to find a hugely expensive part of the global market. For instance, WisdomTree shows a P/E based on forecasted earnings of just 13.8 for the Russell 3000 Value Index, a broad gauge of the U.S. stock market that excludes growth companies.

Morningstar concurs that markets look cheap. As of Aug. 31, the research firm boldly declared that all nine of the Morningstar ���style boxes��� were in undervalued territory. Its fair value estimate is based on a composite of some 700 individual stocks.

This is far different from the P/E picture at year-end 2020. Back then, according to FactSet, the S&P 500���s P/E ratio based on trailing 12-month earnings seemed stretched at around 31 times corporate profits. But as of this past Friday, large-cap U.S. stocks were trading below 20 times earnings���and below both their five- and 10-year averages. It���s reasonable to conclude that stocks are a good value today based on both trailing and forecasted earnings.

The bottom line: Rising corporate profits, increasing dividends and share buybacks, and the simple passage of time will eventually heal all stock market wounds. The longer the market trades sideways to down, the more compelling the valuation picture becomes���and the higher future returns will likely be.

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Money When Needed

INSURANCE COMPANIES��are disproportionately��represented��among the world���s oldest companies. John Hancock was founded in the 1860s. Cigna dates to the 1700s. Some insurers are even older. Why is that?




In my opinion, it���s because they employ a strategy called asset-liability matching. In simple terms, insurers organize their finances so cash is always��available when they need it.




Let���s say each winter typically results in $100 million of auto claims for a particular insurer. If you looked at the insurer���s internal books, you���d see $100 million set aside for winter 2022, another $100 million for��2023, and so��on. By following this approach, insurers greatly reduce the likelihood��they���ll��end up in a cash crunch. They��do sometimes get caught by surprise, but��this technique has��been good enough to help many insurers��survive for 100 years or more.




That���s why asset-liability matching is such a valuable concept. At its most basic level, it���s what financial planning is all about���ensuring��there are sufficient funds to meet��financial��goals��as they arise throughout life. That��said, insurance companies have armies of actuaries to manage this process. For an individual, asset-liability matching would be unwieldy to implement. That could explain why the idea doesn���t get a lot of attention outside insurance circles.




Until now. A recent paper, ���All Duration Investing��� by investment manager Cullen Roche, offers a new perspective on asset-liability matching, one that can be applied more easily to individuals.




Roche starts by building on the concept of duration, an idea typically used only in��analyzing bonds. If you aren���t familiar with duration, don���t worry. It���s a notion that author William Bernstein has��called�����dizzyingly complex.��� The easiest way to think about duration: It���s a measure of how long it will take an investor to��break even on an��investment.




Suppose an investor pays $1,000 for a 30-year bond that will make��5% annual interest��payments. How long will it take this investor to��break even on his $1,000��investment? He���ll receive $1,000 at maturity in 30 years, of course.��But��to break even���,��he won't��need��to��wait that long, thanks to the 5%���or $50���interest payments he receives each year. Result: This investor will receive his full $1,000 back by the end of the 20th year (20 x $50 = $1,000).




Technically, the duration would be even less than 20 years, but the��precise figure isn���t crucial. Instead, the important point here is that duration is a measure of how long it would take an investor to break even. Because of that,��investors often��use duration to measure��the riskiness of��bonds. The longer it will take to break even, the riskier the bond.




The expected return on a bond is a relatively simple calculation that can be done at the time of purchase. In the absence of a default, there���s little uncertainty about the return a bond will deliver. That���s in contrast to the expected return on a stock���and most other investments���which can���t be known at the time of purchase.




This is where Roche���s paper takes a useful leap. While acknowledging that the returns from��most investments��are somewhat unknowable, Roche argues that they can at least be��estimated. Using those estimates, investors can calculate duration figures for asset classes��other than bonds. This includes stocks, commodities and other asset classes.




By way of example, consider how Roche calculates the duration of the stock market. First, he estimates the potential downside. In line with history, he figures that the stock market could decline 55% in��any given year. Then he��makes an estimate of the stock market���s potential future��return. In his paper, Roche uses a real return���that is, after subtracting the hit from inflation���of 4.65% a year. Putting these two pieces together, Roche calculates a duration for the stock market of approximately 18 years.






Here���s how the math works out: If the stock market were to drop 55%, it would take 18 years to recoup that loss and get to breakeven, assuming you notched 4.65% a year. If that sounds like a long time, I agree. But remember, this is just an estimate. As Roche explains, the goal is simply to help investors determine ���how long they can reasonably expect to be underwater in a very bad bear market.���




In reality, the stock market usually delivers above-average returns for a period of years after a steep decline. In 2003, for example, when the market began to recover from the dot-com crash, the S&P 500 rose 29%. Similarly, in 2009, after the worst of the financial crisis had passed, the market gained 26%. Returns like that would get investors to the breakeven point much quicker than 18 years.




The specific figures are less important than the overall concept. The key idea is that investors should attempt to assign��some��duration estimate to each asset class in their portfolio. That then allows them to think in terms of asset-liability matching. To understand this, let���s look at some examples.




The simplest case is cash in the bank. Because it can be withdrawn at any time at full value, cash has a duration of zero. That���s why cash is ideal for near-term obligations���a mortgage payment next week, for example.




Now, let���s look a little further out on the duration spectrum. A short-term bond might have a duration of three years. If that���s the case, these bonds would be most appropriate for obligations that are a few years out������a future tuition payment, for example.




Even further out on the duration spectrum are intermediate-term bonds, with a duration of around five years. These might be appropriate if you���re working��toward buying��a home��down the road.




Finally, at the outer end of the duration spectrum come long-term bonds, stocks and commodities. These are most appropriate for long-range goals, beyond five or 10 years.




While some estimating is required, this duration approach to investing offers several advantages. First and maybe most important, it provides structure. Google the term ���asset allocation,��� and you���ll find millions of results. That���s one reason many investors default to the traditional 60% stock-40% bond portfolio. It seems roughly right and, in the absence of a more formal way to arrive at an allocation, it seems like a reasonable choice. The problem, though, is that everyone is different. For that reason, Roche���s duration-based approach strikes me as a better,��more personalized��way to approach the asset allocation decision.




To be sure, financial planning will always involve some amount of guesswork. If you have young children,��they might go to a private college costing $80,000 a year, or they might go to a state school for half that. The same is true of retirement planning. For instance, your expenses will vary based on where you choose to live. It���s unrealistic to attempt formal asset-liability matching in the way that insurance companies practice it. But��as the old��adage goes, it���s better to be roughly right than precisely wrong.




Roche emphasizes another benefit of this approach: It can help investors contend with the uncertainty of investment markets. When we go through the exercise of assigning a duration to every asset in our portfolio, the result is a better understanding of the role of each investment. Or, to put it another way, we can gain a better understanding of what to expect from each asset.




That can be invaluable during periods of market volatility. Instead of fretting about a decline in stocks or in long-term bonds, we can remind ourselves that these assets have longer durations. Thus, we shouldn���t expect them to bounce back immediately and shouldn���t worry when they don���t. We should instead focus on the expected��breakeven point.




Another reason not to worry: If we���ve done our homework, we should have sufficient short-term assets to carry us through until that point.

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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Tiresome Debates

WHEN I WORKED at The Wall Street Journal, editors used to quip that, ���There are no new stories, just new reporters.��� I don���t know whether that���s the case with politics, sports and technology articles, but it sure rings true for personal finance and investing stories. All too often, the latest hot topic just seems like a rehash of something I���ve witnessed���and often written about���before.

That brings me to three financial arguments that never seem to end. Others still get worked up over these debates. But I find they grow ever more tiresome:

1. Should you use the 4% withdrawal rate? This question gets revisited constantly. But guess what? I���ve yet to meet any folks who actually use the 4% rule or any similar strategy, where they withdraw a designated percentage of their portfolio in the first year of retirement and thereafter robotically increase the sum withdrawn each year with inflation.

I���m not saying the 4% rule isn���t useful. Before Bill Bengen published his seminal study in 1994, many folks had crazy ideas about how much they could safely withdraw each year from their retirement savings. We���re talking 6%, 8% and even 10%. Now, expectations are much more reasonable.

But before we once again start arguing over whether 4% is the precise right number, let���s drag our gaze away from our spreadsheets, look at the real world and ask a simple question: How many retirees will robotically increase their 2023 retirement withdrawals by 2022���s inflation rate���which might be 8% or 9%���after suffering double-digit investment losses this year? You could probably shake hands with all of them at the same time.

2. Should you take Social Security early and invest the money? Yes, if you���re a 100% stock investor, claiming Social Security at age 62 and then investing the money should be a winning strategy. I say ���should��� because there is risk involved. You���re giving up an almost sure thing���higher benefits down the road���for the hope that stocks will fare well. The odds, however, suggest that���ll be a winning bet.

Still, my head explodes whenever I see this debate rehashed for this simple reason: How many retirees do you know who have 100% stock portfolios, without a single dollar in bonds and cash investments? Again, I suspect you could shake hands with all of them at the same time. The fact is, if you have any money in bonds and cash investments, and you have no reason to think you���ll die before your late 70s, a quick breakeven calculation says you���d be better off spending down those conservative investments before you claimed Social Security. End of story.

In other words, like the debate over whether 4% is the precise right number, the debate over whether to take Social Security early and invest in stocks is an absurd waste of time���because it���s totally divorced from how real people behave. My hunch: The only reason this stupid debate lives on is because it makes retirees who claim benefits early feel better about their decision. But these folks aren���t claiming early so they can invest 100% in stocks. Instead, they���re grabbing their benefit early either because they need the money or because they just hate the idea of delaying Social Security and then dying early in retirement.

3. Should you use your spare cash to invest or pay down debt? This debate is similar to the debate over whether to claim Social Security early and invest the money in stocks, but it's more nuanced.

How so? Forget all the rhetorical huffing and puffing. If you think through the expected return and tax implications of different strategies, you can quickly come up with an investment hierarchy. For instance, if you're eligible for a 401(k) plan with an employer match, that should probably be the top priority for your spare cash. Next up should be paying down high-interest debt, notably credit card debt. After that, you might��fund tax-deductible or Roth retirement accounts, or use your spare cash to buy stocks in a regular taxable account. Those will likely be a better choice than devoting money to repaying student loans or mortgage debt.

But what if the alternative is to buy bonds or cash investments in a regular taxable account? In that case, you should probably pay down debt. The reason: The interest you���ll avoid by ridding yourself of debt will likely be higher than the interest you���ll earn by purchasing those bonds and cash investments.

Yes, paying down debt could leave you with less access to cash. But between emergency savings, credit cards, a home equity line of credit and the ability to withdraw your original Roth IRA contributions tax-free at any time, it should be possible to cover any surprise short-term expenses.

That raises the obvious question: If what I say is true, why do many folks resist paying down debt? Some may have mortgages or other debt with interest rates that are less than the yield they can earn on bonds, so buying bonds would be the rational choice.

But others aren���t so rational. Some folks cling to mortgage debt that���s costing them dearly, even after factoring in any tax savings. Other people argue that it���s somehow virtuous to always carry at least a little debt. Oftentimes, it seems these folks are puppets of financial advisors who nudge their clients to continue carrying debt. Why? That leaves more money in the clients' portfolio���thereby ensuring the advisor earns fatter fees.

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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Just Enough

PHYSICAL THERAPY is a teaching profession. I am the teacher and my patients are the students. They come to me with a problem in need of a solution. I help them find the answer.

Most of my patients have never faced the daunting challenge of overcoming a physical disability caused by injury or disease. They don���t know where to begin. Many have also never put in the sustained effort needed to achieve a tough goal. I���m tasked with teaching them both���giving them the knowledge that they need to get where they want to go and encouraging them to put forth the effort required to get there.

I know how they feel. I had never really settled on a serious career goal until my early 30s, when I decided to return to college to train to become a physical therapist. At about the same time, I decided to become an ���expert in investing.��� I didn���t know at the time what that meant, but I figured I needed to be one so I could retire one day. I did know that I knew nothing about investing, and would need to begin from scratch.

But first, physical therapy. I learned the basics, about muscles and joints, nerves and organs, and about the chemistry of the body. I went on to learn how all the parts work together to produce movement and allow us to interact with the world around us. Finally, I learned treatment strategies to help restore the bodies of those who need physical therapy to regain what they���ve lost because of a joint injury or a stroke. I landed my first physical therapy job at age 36.

I didn���t know it then, but I was following the centuries-old, three-stage classical model of learning. In the grammar stage, the basics are learned through memorization and review. In the logic stage, the individual parts are put together and put into practice. In the rhetoric stage, the student is ready to share knowledge with others.

I think about this three-step process when I���m treating patients. Let���s say that disease has left a person a little too weak to get up from a chair by herself. She has done this seemingly simple task all her life without thinking about how she does it, and can���t figure out why it has become so complicated. Standing up from a chair is a big goal for her. It���s the beginning point so she can get on with the rest of her day. She looks to me to teach her how to make that first big move.

Initially, we work on the basics���learning the right exercises to strengthen the right muscles and how to reposition the body to gain a mechanical advantage. We move on to putting that knowledge into practice, and one day she rises independently from sitting to standing. She has an epiphany. What was complex becomes simple. The next thing you know, she���s teaching her friends what the nice PT taught her. Is she an expert in physical therapy? No, but she doesn���t have to be. She knows just enough to achieve her goal.

I followed this same classical learning model when I turned my attention to becoming that investment expert I so desired to be. The most important basics I had already learned from my parents. I was a good saver and a frugal spender. These behaviors allowed me to max out contributions to the 401(k) that came with my first PT job and, soon after, my first IRA.

Along with my wife, I continued to learn basic information by taking a community college night course in personal finance and through reading some books and online material. We both learned about the importance of diversification, proper allocation and low investment fees, and about the astounding results of compound interest.

Over the course of several years, we learned to put this information into practice by choosing low-cost, broad-based index funds for various asset classes. As the years went by, we saw our knowledge and our portfolios grow. I had my own epiphany, and again the complex became simple. I eventually realized that I knew enough to show others the right path to take them a long way toward retirement.

Twenty-four years after making my first investment, I am perhaps four or five years from full retirement. I am in the midst of my current education project, learning the best strategies to generate income and save on taxes during retirement. My wife, also a PT, is down to working one day a month, but spends many long hours helping family members who depend on us.

Have I become that investment expert I thought I needed to be? Hardly. But like my patients, I don���t have to know all there is to know. Instead, I need to know just enough to achieve my retirement goal.

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

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