Jonathan Clements's Blog, page 205

Made to Measure

IT SEEMS ALL MY LIFE I���ve been obsessed with one thing: not being average. It would be nice to be the best or the highest rated. But I have been happy simply to avoid average.

I grew up in a very average family. There���s nothing wrong with that, of course. Throughout school, I was very average. But in my first job as a mail boy, I went to work wearing a dress shirt and tie. Definitely not average���others in the mailroom wore T-shirts���but I started a trend.

When I was in the Army, I didn���t want to be one of the guys standing in the ranks, so I found a way into an office job as a personnel sergeant. There, I could avoid average duties, instead assisting the colonel in preparing job evaluations for the officers reporting to him���most of whom I never met.

I never wanted to have an average income, live in an average neighborhood or be an average retiree. I���ve often wondered whether there���s a flaw in my personality. Probably yes. But that may require more analysis than I���m prepared to do.

When we relocated a few years ago, I felt compelled to look up the median income for our new town, along with its wealth ranking in our state. The town was near the top in median income. I couldn���t compete���but that also meant I wasn���t average.

Even today, more than 12 years after I retired, I measure my Social Security benefit, my income and my net worth against national averages and medians for my age group. There���s little chance I will slip to average, but I want to be sure.

I also measure debt. On average, retirees carry a fair amount of debt. I���m debt-free. Except for mortgages and some car loans 20 years ago, I���ve long been obsessed with avoiding debt. I still am.

While working, I didn���t want to simply be one among 15,000 employees.�� Being involved with employee benefits, I found ways to communicate benefits issues with all employees and unions almost daily via e-mails, meetings and so on. Result? I was among the most recognized people in the company. The corporate communications department accused me of having my own brand. But at least I wasn���t average.

When I received stock options during the last few years of my career, I exercised them and then hung on to the stock���definitely not an average thing to do. But considering the years of reinvested dividends and a doubling of the stock price, I���m happy I did. Taking the average route probably would have led me to blow the cash.

So, what���s my self-diagnosis? Trying not to be average is how I set goals, how I measure success. To be sure, a goal of not being average doesn���t sound very ambitious. But it doesn���t sound very greedy, either.

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Insuring Infirmity

LONG-TERM-CARE insurance and disability insurance can both be part of a comprehensive financial plan. But is it a good idea to have both coverages at the same time, or could one substitute for the other? After all, both policies are designed to help those who are, in some way, infirm.

To answer this question, let���s start with another one: What���s the purpose of insurance? The best use of any type of insurance is to guard against financial disaster. It isn���t there to provide a discount on expenditures you could otherwise afford or to play a wealth-building role in your portfolio. There are more efficient means than insurance to accomplish these other goals.

Insurance is a game of chance. In terms of dollars exchanged, there will be a winner and loser on every policy. It will be the insurance company that wins more often than not. Actuaries pore over data to make sure of this.

Just remember, that���s okay. When a policyholder receives more benefits than premiums paid, that means the bad thing that no one wants to experience actually did occur. If the bad thing never happens, that���s cause for celebration. It���s also why, for insurance to do its job, you don���t need to get out more than you paid in.

What financial disasters are disability and long-term-care insurance intended to prevent? Disability insurance is there for those whose health problems take away their ability to earn income. Long-term-care insurance guards against a rapid drain of funds if you need assistance with the basic activities of daily life.

You don���t need disability coverage unless you and perhaps others depend on your ongoing income. You might need enough coverage to meet basic living expenses and service debts, such as a mortgage.

Long-term-care insurance can bolster your confidence by knowing you will always be cared for. You also needn���t fear running out of money and being forced into an undesirable care situation, such as being in a facility that accepts Medicaid but doesn���t meet your expectations.

These two insurance coverages are opposite sides of the same coin. Disability insurance helps make sure you get the money you expect to earn but haven���t yet. Long-term-care insurance helps you keep more of the money you already have.

The benefits are calculated differently, as well. Disability coverage provides replacement income figured as a percentage of your wages, perhaps 60%. Long-term-care coverage offers reimbursement for care expenses up to a daily maximum, such as $200 a day.

In both cases, if you file a claim, typically a medical professional will be called in. What will he or she be looking for? When it comes to a disability policy, you must know which definition of disability you���ve signed up for. An ���any occupation��� definition means you won���t receive a benefit unless you are deemed unable to work a job of any kind.

By contrast, an ���own occupation��� policy will pay your benefit as long as your disability prevents you from employment in your specific field. This can be a dramatically more favorable standard for the insured, especially in a high-income field.

Long-term-care insurance requires an entirely different assessment. What matters is whether you display cognitive impairment or can perform six activities of daily living, such as the ability to get dressed, feed yourself, and walk or move around. Typically, if you���re unable to do at least two of the six activities, you qualify for benefits.

Make sure you understand how long you���ll have to wait for benefits to begin. Sometimes, the elimination period can last for months. It���s also important to know how long benefits can continue. Is it for one year or five?

Now that you know the fundamentals, let���s return to the question at the top: Is it a good idea to have both coverages at the same time, or could one substitute for the other?

Because the two policies are designed to protect you from two separate financial catastrophes, long-term-care insurance usually isn���t a true substitute for disability insurance. Still, if you worry more about preserving the wealth you already have than about having more years to keep earning it, that���s a sign that you���re adequately self-insured against the loss of income due to disability.

In that case, shopping for a long-term-care policy might be your cue to drop your disability policy. Remember, even without a disability policy, you may still be covered by Social Security��disability insurance or by a group policy through your employer.

Are there good reasons to keep disability insurance, while also adding a long-term-care policy? I can think of three:

Maybe you started a family later in life, and want to backstop your income until your kids are no longer dependent.
Maybe you invested the time and money in a late-career change and want to hedge against the risk of not having enough years of income from your new job to see a satisfying return on your investment.
Perhaps you have a target inheritance amount you���d like to leave your heirs, and you���re counting on several more years of income to make that happen���working years that could potentially be lost if you suffered a disability.

If you do buy both, just remember that for anything these policies are designed to cover, you and other policyholders will be footing the bill. The insurance industry isn���t in the business of giving away financial security. The math has to work���and, if it doesn���t at first, insurers will adapt to make it work.

There���s no better example of this than the initial mispricing woes of traditional long-term-care policies. Companies underpriced the coverage in the early years. We���ve seen changes to policies���and reductions in participating carriers���ever since.

What���s the outlook for long-term-care insurance? Some are optimistic that higher interest rates will soon help make the policies more attractive to providers. Earning anything more than the recent, near-zero rates on reserves will help insurers.

But high inflation will provide a headwind for them as well. If long-term-care policies don���t appeal to you, there are other options for planning for care, including new types of life and annuity coverage. But, alas, there���s no silver bullet.

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

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Lemons to Lemonade

MORE WEALTH HAS been lost in this year���s stock and bond market decline than in any previous downturn, according to research firm Bespoke Investments. And, no, that doesn���t include the $2 trillion of crypto value that���s gone up in smoke.

A counterpoint to this jarring reality: Folks today are wealthier than during previous bear markets. Goldman Sachs reports that U.S. household net worth as a percentage of disposable personal income remains sharply above pre-pandemic levels. This��metric is also above where it stood at any time from 1960 through 2020.

All this isn���t as contradictory as it might seem: More wealth means our losses have a larger dollar value. If you���re like me, a 20% or so hit to your stock funds feels bigger than ever���even bigger than during the larger percentage declines experienced in 2008. That���s simply because of bigger portfolio values this go-around.

My advice: Stop focusing on your losses���and ponder how to position yourself for the eventual market recovery. Rebalance your portfolio. Consider a Roth conversion so future gains will be tax-free. Take tax losses and move the proceeds into better-diversified, lower-cost investments.

Also increase your monthly savings. For instance, you might boost your 401(k) contribution percentage. Upping your retirement plan savings from, say, 6% of income to 10% means you���ll buy more shares during this dip, but it likely won���t feel like a big loss to your paycheck. Indeed, if you find that it isn���t a strain on your finances, persisting with that higher savings rate will lead to a much bigger net worth over time.

What���s unique about 2022���s bear market is that, so far, unemployment remains exceptionally low, and consumers are still flush with more than $2 trillion of excess cash, according to Goldman Sachs. That means many households, while frustrated by high gas and food prices, are well positioned financially to meet the rising cost of living. They can also put more of that cash to work in attractively priced U.S. stocks and bonds, as well as cheap international markets.

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All Fall Down

SINCE THE START of the��year, the stock market has dropped almost 24%. That���s significant, but it pales next to the losses suffered by cryptocurrency investors, with the shellacking continuing into this weekend.

Dogecoin��is down more than 90%, and smaller currencies like��terra��have lost essentially all their value. Even bitcoin and ethereum, which are much more established, have suffered big losses. Ethereum is down around 75% year-to-date,��and bitcoin has fallen some 60%. From its peak last fall, bitcoin has lost more than 70% of its value. Whether or not you own cryptocurrencies���and whether they go up or down from here���there are useful lessons for all investors.

1. A powerful myth.��In psychology, there���s a concept known as the ���near-miss effect.��� Suppose you walk up to a slot machine, insert a coin��and pull the lever. If��you��don't even��come��close to winning, you might be discouraged and��walk away.

But suppose that, when you pull��the lever, two��cherries��come up���a near miss. Psychologists have��found��that this type of result turns out to be��encouraging��to gamblers, who think to themselves, ���I was so close. If I try again, maybe I���ll win.��� In fact, some have��argued��that slot machine makers know this and design machines to generate disproportionately more near misses to keep folks playing.

This phenomenon impacts investors as well. If you see a friend or neighbor making quick profits with speculative bets, you might think to yourself, ���I know him. If he can do it, I can.��� There���s been a lot of that over the past few years.

Thanks to the extreme price gains following the 2020 recession, investing began to look easy���and the more speculative the investment, the easier it looked. From its low point in spring 2020 to its peak last fall, bitcoin had risen tenfold. Everyone, it seemed, knew someone who had done well with crypto, meme stocks or other speculative bets. That drew others in.

As we see these bets unravel, what���s the lesson? Just as slot machine makers use the near-miss effect against us, we should recognize that Wall Street does the same thing. Whether it���s with E*Trade���s��talking baby��or with other primrose path enticements, the industry���s goal is to make easy money appear to be just a click away. Recent experience should help dispel this myth. I'd ignore Wall Street's enticements, and I'd��also ignore what your friends and neighbors are doing.

2. Know why.��In 1994, fund manager Peter Lynch��gave a talk in which he described the pitfalls investors face. He stressed that investors should ���know what they own.��� Too many investors, he said, buy stocks for no other reason than, as he put it, ���that sucker���s going up.���

Logically, we all know that���s not a good reason to buy anything. But when frenzies get going, that���s the sort of thing that happens. In part, that���s due to FOMO���fear of missing out. Also, as I��noted��last week, rising prices appear to validate investments. If investors see the price of an investment rising, they figure ���the market can���t be wrong.��� They assume there must be a good reason for the price gain.

That thinking isn���t entirely off base. The market, in aggregate, may reach more sensible conclusions than any one individual. At the same time, though, markets are also susceptible to herding behavior, and that can lead us badly astray. Here���s a simple illustration: If A buys an investment, that puts upward pressure on its price. That will make it more attractive to B. If B buys, that puts further upward pressure on the price, attracting C. And so on. But nothing has fundamentally changed. The investment itself isn���t any better. In my opinion, that���s what���s been happening with cryptocurrencies.

As��Bill Gates��put it, cryptocurrencies are based on the ���greater fool theory.��� That���s another way of saying that cryptocurrencies lack��intrinsic value. They don���t produce anything���unlike stocks, for example, which can generate dividends, or bonds, which pay interest. As a result, crypto investors��� only hope for profit is to resell their currency to someone else at a higher price.

Cryptocurrencies aren���t the only investments that lack intrinsic value. But the current meltdown in prices illustrates an important lesson: When an investment lacks intrinsic value, its price will be much more volatile and unpredictable, because there���s no underlying logical basis to its value. Unlike a stock, a bond or a piece of real estate, there���s nothing supporting the value of cryptocurrencies, and that means they could theoretically drop to zero���as unhappy terra investors have��learned.

The bottom line: Never buy an investment just because it���s going up. Buy an investment because you think its price is lower than its intrinsic value or because you think its intrinsic value will increase.

3. New things.��The drop in crypto also teaches investors something about new and untested ideas. The reality is that this should have been bitcoin���s year to shine. Here���s why: The underlying structure of bitcoin allows for only a fixed number of bitcoins to ever exist. With bitcoin, there���s no equivalent of the Federal Reserve that could create more. For that reason, its supporters argued that bitcoin should be theoretically immune to inflation. But in 2022, we���ve seen just the opposite. The dollar has been devalued due to above-average inflation, and yet bitcoin has��dropped��relative to the dollar. It should have been the other way around.

The lesson: With new things, there���s often a gap between what���s expected in theory and what happens in reality. It���s okay to invest in new things, but not too much.

4. Craziness.��The drop in crypto prices brings to mind an insight offered by veteran investor Jeremy Grantham. Over the past few years, he���s been cautioning about a market bubble, pointing to higher valuations and accelerating price increases. But Grantham often talks about another factor. It���s harder to measure,��he says, but in every market bubble there���s ���crazy behavior.���

As examples, Grantham cites bitcoin and stocks like GameStop, which gained a cult following for no rational reason. In hindsight, it���s clear that Grantham was right. The lesson: Investors should become cautious when they see market valuations rising but should become especially cautious when they begin to see signs of craziness.

5. A matter of perspective.��If you own bitcoin, I wouldn���t blame you for being unhappy right now. But keep in mind the behavioral bias known as anchoring. If you owned bitcoin last year at $67,000, and now it���s around $18,000, it���s hard to ignore the loss. But if you purchased it two years ago, when it was below $10,000, you���d still be sitting on a profit. The same, in fact, is true of conventional market indices like the S&P 500. Yes, it���s lower year-to-date. But in thinking about your investments, don���t focus only on the high point. What matters is the long term.

6. Splitting the difference.��In the past, I���ve recommended to bitcoin holders that they take at least some of their gains off the table, either by selling or by contributing to a donor-advised fund.

What about now? Has that opportunity been lost? I don���t think so. Even though bitcoin is down by more than 70%, I���d still give that advice. Take some money off the table. Because bitcoin lacks intrinsic value, it���s anyone���s guess how low it might go, so it seems entirely sensible to sell some, even at today���s price. In fact, I'd view it as a win-win. If bitcoin drops further, you���ll be glad you didn���t hold it all the way down. What if it rebounds? You���ll be glad you didn���t sell it all.

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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Troubled Water

I RECENTLY MADE a good decision, all thanks to director John Frankenheimer���s penultimate film, Ronin. In it, Robert De Niro plays a mercenary who, early in the movie, refuses to enter the roadway under Paris���s Pont Alexandre III because he���s wary of getting caught in an ambush. It���s a decision that saves his life and that of his colleagues. When he���s later asked about the decision, he replies, ���Whenever there is any doubt, there is no doubt.���

A few months back, my wife received a postcard offering a free set of steak knives or a 40-piece socket tool set. As my wife really likes steak, she called the number on the postcard and set up an appointment with a salesman from EcoWater Systems, a water-softening industry leader ���with game-changing innovations,��� who would give her the knives after we listened to his sales pitch.

A few weeks later found Sam standing in our kitchen testing our water for hardness and asking us innumerable questions about our clothing, cleaning and coffee needs. After about 15 minutes, my wife broke into his spiel and asked him if he ���could cut to the chase.��� He replied that he couldn���t and, over the next 45 minutes, explained how a whole house water-softening system could make our clothes last longer, our house cleaner and our coffee taste better.

And we could have all this for only $115 a month���for the next six years. Now, I was concerned about the hardness in our water causing future plumbing issues, plus the other benefits sounded nice. My wife appeared excited about a future filled with less lint in the dryer, better tasting water and healthier, softer skin. Still, $8,280 seemed a bit steep.

But what did I know about the chemistry of tap water? I started to get a little concerned about making the wrong decision. Then Sam said the magic words that made all my worries go away: ���You have to make a decision right now��� as soon as I leave, the offer ends.���

I immediately visualized De Niro drawing his Colt .45 semi-automatic and shooting the sniper hiding under the bridge���who was about to shoot his colleagues���and thought, ���Whenever there is any doubt, there is no doubt.���

I immediately asked Sam, ���So��� where are my steak knives?���

I knew I might be on to something when Sam said the offer would actually be good until later that day���right up until he ���submitted the time sheet to my supervisor.��� I then reinquired about my knives, adding, ���How many of these deals do you actually close?��� When he replied ���90%,��� I knew he was full of it and I just wanted it to be over.

When Sam left, I was without soft water or steak knives, as he was out of the latter. All he had left was the 40-piece socket set. My wife was relieved I didn���t bite, and later mentioned that I was way too smart to fall for Sam���s schtick. I thought she might be laying it on a little thick, but then figured she might be right. As De Niro said in The King of Comedy, it���s ���better to be king for a night than schmuck for a lifetime.���

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A Costly Education

THE PUNGENT ODOR of formaldehyde filled our nostrils. Rows of cadavers lay before us on cold metal tables. The class was gross anatomy and we were nervous first-year medical students. That day marked the beginning of our long, arduous journey to becoming physicians, lasting anywhere from seven to 13 years, depending on the specialty.

Money was the furthest thing from my mind that day. But for many of my peers, financial worries cast a long shadow. They had begun to amass a mountain of debt that would average more than $200,000 by the time they earned their medical degrees. That was on top of any existing debt carried over from college. Though blissfully unaware, I was at a huge advantage because I was unencumbered by student loans, thanks to the generosity of my parents.

I didn���t exactly excel in medical school. Memorizing hundreds of muscles, bones and nerves just wasn���t my cup of tea. I was more comfortable around numbers, which explains my passion for finance. But I���m getting ahead of myself.

After four years staked out in the library and hospital wards, I finally graduated medical school. Unfortunately, a medical degree hardly prepares you to practice medicine. That���s the function of residency and fellowship, which come after medical school and often last longer than medical school itself. I chose to follow in my father���s footsteps and pursue radiology, which meant another six years of training. I completed my radiology residency in San Francisco and fellowship in Palo Alto, which is where I married my medical school sweetheart. Despite the long hours and brutal nights when I was on call, I relished those years. I finally felt like I was making a difference in the lives of my patients.

One night, while on call as a resident, I read a scan of a young girl with suspected appendicitis. The appendix looked okay to me, but the girl���s ovary had an unusual appearance���one which suggested possible ovarian torsion, a twisting of the blood supply to the ovary. This was unusual for a girl of her age. I immediately performed an ultrasound, which seemed to confirm my suspicions. I���ll never forget the tears in her parents��� eyes as I explained what I saw and the emergency surgery that would be required to salvage their child���s ovary. That my actions could send a child to surgery���or send her home and cause her to lose an ovary���left an indelible impression on me. As a physician, I was entrusted with something both sacred and priceless���people���s health.

Over the next six years, I pored over radiology textbooks and learned alongside some amazing radiologists. From a purely financial standpoint, it was an investment in human capital, and a sizable one at that. It cost my parents hundreds of thousands of dollars in medical school tuition, room and board, and it cost me 10 years of my life. But ultimately, the investment would pay handsome dividends, both financially and vocationally.

In 1997, I earned $32,000 a year as a radiology resident. After contributing $9,500 to my 403(b) account and paying payroll taxes, my take-home pay was $1,500 a month. It wasn���t a lot, but I never felt poor. I had plenty to eat and a roof over my head. Besides, most of my time was spent either working in the hospital or studying textbooks at home, and I was surrounded by peers who were doing the same. While my official training was in radiology, I was subconsciously learning a financial lesson of immense value���that you can lead a very satisfying life on a modest income.

Then it happened. A decade after that class in gross anatomy, I finally became an ���attending��� or full-fledged physician. I landed a job in Southern California with a medium-sized radiology group and started working in earnest.

The transition from trainee to attending physician is absolutely pivotal in the financial journey of any physician. When a trainee becomes an attending physician, his or her income skyrockets. A fivefold or greater bump in income isn���t uncommon. In some cases, this is followed by a second, albeit more modest, boost in income several years later, when the doctor becomes a full partner in the practice. Many physicians immediately grow into their attending salary. Imagine delaying gratification for a decade or more, spending most of your life in the library and hospital. The urge to splurge is powerful. Moreover, you���re surrounded by colleagues who drive fancy cars, live in upscale neighborhoods and go on exotic vacations.

I���ll confess, as a newly minted attending physician, I did my share of splurging. I replaced my beaten-up clunker with a brand-new Toyota Camry, and my wife bought a Lexus SUV. We moved into a two-bedroom apartment with a community pool and tennis courts���a big upgrade from the hole-in-the-wall we inhabited in San Francisco during residency. We also ate out and traveled more. But on the whole, we were slow to upgrade our lifestyle. This meant we were able to save prodigious sums. Our savings rate ballooned, ranging between 40% and 60% most years. Living modestly on a physician���s salary is a financial superpower. More than anything else, this paved our path to financial freedom. What���s more, our relative frugality hardly diminished the joy we experienced. As researchers have discovered, the happiness we derive from money is subject to sharply diminishing returns.

Hatching plans. A turning point in my financial journey occurred a few years into private practice, when I was asked to serve as a trustee for our group���s retirement plans. At the time, our radiology group had a traditional 401(k) plan, a profit-sharing plan and a cash balance pension plan. As trustees, we were responsible for overseeing the three plans.

Our cash balance plan was a lot like a traditional company pension. Participants contributed pretax dollars to the plan. They were guaranteed a future payout based on their contribution history and the plan���s investment returns. Since many of my partners made large contributions every year, the plan quickly grew to a substantial size. While the trustees didn���t directly manage the investments, we oversaw the financial advisor who did.

By the time I became a trustee, our group had been working closely with the same advisor for many years. Many of my coworkers also hired him to manage their 401(k) investments. But I became increasingly disillusioned by what I saw. For example, the DoubleLine Total Return Bond Fund had been a staple of the cash balance portfolio for years. We had a few million dollars invested in that one fund alone. I noticed that the fund had two classes of shares, retail and institutional. For some reason, we were invested in the pricier retail shares. Those shares had a 12b-1 fee equal to 0.25% of assets, while the institutional fund didn���t. This fee went to brokers who sold the fund.

Given our sizable investment in the DoubleLine fund, we were needlessly paying thousands of dollars in extra fees each and every year. When I asked our advisor why we weren���t in the institutional share class, he promised to look into it. Months went by and we heard nothing. After more prodding, he moved us into the institutional shares without so much as an explanation.

On another occasion, our advisor proposed we make sizable investments in a nontraded real estate investment trust and a variable annuity, both inside our cash balance plan. Though our advisor never mentioned it, I discovered that both investments paid generous commissions to the selling broker���namely, our advisor. How much of our cash balance plan did he suggest we put in the annuity? ���Just��� 50%.

We ended up firing the advisor. These experiences reaffirmed my belief that no one cares as much about your money as you do. Don���t get me wrong: There are many upstanding advisors who do good work, and they can add great value outside of portfolio management. But it���s my view that once you know enough to separate the wheat from the chaff, you should consider managing your own investments. Don���t underestimate the power of compounding: Saving 1% or 2% in fees over a lifetime can really add up.

While I was a trustee for our cash balance plan, I was also an investor. One of the most important decisions I had to make: whether and how much to contribute. Participants could choose their annual contribution amount up to a limit, as determined by their age and years with the group. The amount of money at stake was considerable. The more senior members, for example, could make tax-deductible contributions of $200,000 or more per year. In a high-tax state like California, this was very appealing.

But since a cash balance plan is a pooled account with a guaranteed rate of return���for years, the 30-year Treasury yield was our benchmark rate���it had to be invested very conservatively. If the portfolio sustained a sizable loss, we would have to make up the shortfall. By ���we,��� I���m referring to the participants in the plan, which was nearly everyone in our group. Because of this, the plan typically kept about 70% in bonds, with the remainder in stocks. Such a conservative allocation was destined to generate modest returns.

The consensus among my partners was that the tax benefits far outweighed these limitations. I wasn���t convinced. Given the enormous money at stake, I ran some numbers. My fundamental question: Should I save large sums in the tax-deferred cash balance plan with its low expected return���or should I pay taxes on my earnings and then invest in a taxable account with higher expected performance?

If I went all-in on the cash balance plan���as many of my partners did���I���d likely retire with a huge 401(k) balance. That���s because, when partners retired or left the practice, their portion of the cash balance plan was rolled into their 401(k). On the other hand, forgoing the cash balance plan meant taking a large tax hit today and investing the after-tax savings in a taxable account. Despite that big tax hit, my spreadsheet showed that the taxable account might beat out the cash balance plan on an after-tax basis. This was chiefly due to the higher expected return for my more aggressively invested taxable account. Ultimately, I decided to hedge my bets, contributing some money to the cash balance plan but also saving significant sums in a taxable account.

Toward the end of my tenure as a trustee, I lobbied hard to add another type of retirement account: the Roth 401(k), which would offer participants tax-free growth but no initial tax deduction, unlike the traditional 401(k) plan we already had in place. Here, we dragged our feet. Though the Roth 401(k) was born in 2006, our group didn���t add a Roth 401(k) option until 2014. I believe this was a serious mistake. While the cash balance plan was popular, given its obvious tax benefits, the lack of tax diversification it encouraged was a major downside.

To get a sense of the problem, imagine the following scenario: You���re a high-earning physician who is also an aggressive saver. You���re able to contribute more than $60,000 a year to a traditional 401(k) and profit-sharing plan, plus another $200,000 or more to a cash balance plan, depending on your age and years with the group. Now imagine doing this consistently, year after year. By the time you retire, you���ll have built an enormous tax-deferred nest egg, with income taxes owed on every dollar withdrawn.

Many of my partners did just that. But they probably saved little to nothing in a taxable account or a tax-free Roth account. This lack of tax diversification could come back to haunt them in retirement. The assumption that they would enjoy a lower tax rate in retirement could prove badly wrong, given the substantial required minimum distributions that must start at age 72. Should income tax rates rise from today���s historically low levels, that would only compound the problem. Roth 401(k) accounts���coupled with Roth conversions���could provide some tax relief in retirement.

Choosing badly. Our practice���s 401(k) plan was entirely self-directed, offering the sort of choice found in a traditional brokerage account. Participants could buy and sell what they wanted, when they wanted. The commissions were relatively low���later to disappear altogether���which reduced the frictional costs of trading. Complete freedom to invest as one pleased, combined with near zero commissions. Investing nirvana, right? Not so fast.

Some physicians hired financial advisors to manage their 401(k) investments���including the less-than-scrupulous advisor mentioned earlier. About half were self-directed. Without an iota of formal financial education or training, many saw fit to manage their retirement nest egg completely on their own, me included. It was like giving a layperson a scalpel and forceps, maybe throwing in a surgery textbook or two, and saying, ���Take out the patient���s appendix.���



The results were predictable. Although I joined the group in 2002, I heard stories of fortunes made and then lost during the late 1990s technology stock bubble. Some portfolios held just five or fewer stocks. Others languished 100% in cash. By the looks of the hyperactive trading in some accounts, you might have guessed we were running a hedge fund rather than a medical practice.

It���s clear to me now that most of us would have been far better served by a menu of fewer but smarter investment options inside our 401(k)���things like target-date funds and index funds. If I could go back in time, I would have made age-appropriate, low-cost target-date funds the default investment within our plan. Smart defaults and free choice can coexist. If plan participants don���t like their default target-date fund, they could switch into other investments. But my guess is that many of my coworkers would have appreciated a gentle nudge in the right direction. The federal Thrift Savings Plan, which I would encounter later in my career, is a model in this regard.

Physicians are a proud and confident lot. Years of academic success and being addressed as ���doctor��� can go to our heads. Add to that generous compensation and you have the makings of a toxic brew. Physicians���especially male physicians���suffer from supreme overconfidence. We fall prey to the specious notion that we can beat the markets, in our spare time, no less.

I, for one, should have known better. Fairly early in my career, I���d read some of the investing classics���A Random Walk Down Wall Street by Burton Malkiel, Common Sense on Mutual Funds by John Bogle, and The Four Pillars of Investing by William Bernstein. The message was loud and clear: Markets are efficient. Passive investing was the way to superior results. But pride and overconfidence intervened, whispering, ���Surely you, John, are not an average investor.��� Unfortunately, I believed the lie. Here���s just a sampling of my investment mistakes:

Amazon.com. I bought the stock, along with other internet darlings, during the dot-com craze of the late 1990s. Most went to zero. After getting back to even, I sold Amazon for a split-adjusted $2.50 a share. Price today? Even after getting roughed up of late, it still trades above��$100.
XM Satellite Radio. After reading a bullish article in SmartMoney magazine, I invested in this growth stock. Not long after, the stock began to plummet. After doubling down several times, I managed to turn a small loss into a sizable one.
Sears Holdings. Here I followed in the footsteps of wunderkind investor Eddie Lampert, who some were calling the next Warren Buffett. This was by far my largest investing blunder. When Sears finally filed for bankruptcy, I had lost about a year���s wages on this investment alone.

Now that you���ve lost all respect for me as an investor, let me say that I���ve also had my share of investing successes. Amid 2008���s global financial crisis, I made large investments in the big banks that paid off in spades. More recently, I bought aggressively during the COVID-19 bear market of 2020, investments that have paid off handsomely so far.

But on the whole, I sincerely doubt that my investments have outperformed a simple index-fund portfolio. Even if I had marginally outperformed the averages, it wasn���t worth the cost. As any economist will tell you, there are opportunity costs to every decision. How do you place a price tag on the hundreds of hours spent researching stocks and poring over the market, time which could have been spent in other, more fulfilling endeavors? Time is the one commodity that can���t be recouped.

Leap of faith. About four years ago, my life took an unforeseen turn. Our children were approaching their teen years, but we had yet to find a suitable high school for them. This was not for lack of trying. Public school, private school, homeschooling���we had tried them all. The ideal school seemed an elusive dream.

Our parenting philosophy may seem extreme to some, but providing our children an opportunity to thrive academically was our highest priority. My own parents sent me to boarding school in the seventh grade. It was a major sacrifice for them���and a rough few years for me���but, in retrospect, I benefited enormously. Now, it was time to do the same for my children.

Eventually, we found what seemed to be the ideal school���one that grouped students by ability rather than age. There was just one problem: It was located in another state. While our children���s education was of paramount importance to us, we weren���t willing to break up the family so they could attend. If our children were to go to this school, we were moving as a family. By this point, I had been with my Southern California radiology group for nearly 16 years. It wasn���t the perfect job���no job is���but it was an incredibly stable and desirable one by most criteria. On top of that, I had toiled four long years just to become a full partner. Moving meant giving all that up and starting over from scratch.

A preliminary job search had come up empty. Still, I assured my wife that we could afford to move even if I didn���t find a job right away. Years of saving aggressively had put us in a position to make a difficult choice based on our values rather than our finances. While we weren���t financially independent at that point, we were financially secure enough to make a leap of faith. I took great solace in Ecclesiastes 3: ���To everything there is a season, and a time to every purpose under the heaven.��� It was the season to invest in our children���s education.

Having no job leads, I sent my CV to as many radiology practices as I could find through the internet. I also tried cold calling. Nothing. Either radiology groups weren���t hiring or they were only considering people they knew through personal connections. It seemed like I might be unemployed for the first time in my life.

One day, as I was dictating cases alone in the ���reading room������the term radiologists use to refer to our dark, computer-packed work area���a thought occurred to me. What about a Veterans Affairs (VA) hospital? As a radiology resident in San Francisco, I���d spent a few months training at the San Francisco VA. Rotating through the VA was a godsend for sleep-deprived residents since the patient volume was far lower than at other hospitals. But working for a VA hospital as a fulltime attending physician had never before crossed my mind���until now.

A quick Google search returned an immediate hit. There was indeed a VA hospital where we planned to move. Feeling an invisible nudge, I picked up the phone and placed a call. After being transferred to the radiology department, I asked the person on the other end, ���May I speak to one of your radiologists, please?��� After what seemed like an eternity, a man picked up the line. It was the chair of the radiology department. Trying to hide my trepidation, I introduced myself and explained, ���My family is moving to your town in a few months. I was wondering if you have any job openings for radiologists.���

I heard a pause and then a quiet chuckle. My heart sank. Was my desperation so obvious? ���That���s funny,��� said the voice on the other end. ���Just last week, one of our radiologists gave notice that he plans to leave. So, yes, we have an opening.��� He gave me his email address and asked for my CV.

As I put down the phone and sat in silence, goosebumps rippled over my body. What had led me to make that phone call at that moment? Had I called a few weeks earlier, I would have been rebuffed. Had I searched the official government job website, I would have come up empty���the job hadn���t yet been posted. Was it an amazing coincidence or had I just witnessed a miracle?

Over the next month or so, I interviewed for the position and was offered the job. In becoming a government employee, I took a very steep pay cut. But having a job was infinitely better than the alternative���being unemployed. I soon learned that there are wonderful benefits to being a federal employee: an inflation-adjusted pension upon retirement, access to an excellent defined contribution plan���the aforementioned Thrift Savings Plan���with generous matching contributions, and amazing health insurance benefits, to name just a few.

But it turned out that the greatest benefits were nonfinancial. After joining the VA, I channeled my passion for finance into spreading financial literacy. I developed a curriculum for health care staff and trainees, giving monthly talks on personal finance and investing. Later, I taught an elective on personal finance to fourth-year medical students at a local university. It was also around this time that I started writing for HumbleDollar��and I finally published my first book, How to Raise Your Child���s Financial IQ: The Most Important Things, which was years in the making.

This latest phase of my life and financial journey are replete with lessons. The first one is immortalized by Robert Frost���s beautiful line in The Road Not Taken: ���Two roads diverged in a wood, and I���I took the one less traveled by, and that has made all the difference.��� Giving up a secure, well-paying job in midcareer was viewed by many as financially irresponsible. But what I discovered was that the road less traveled is often the most scenic. The educational benefits for our children were well worth the move. But the risk we took also paid off for me both personally and professionally.

The second lesson is that financial security opens up doors. One reason we were willing to leave California was that our financial house was in order. Had it not been, I wonder whether we would have taken such a large risk. In the end, financial freedom is about far more than retiring early and hitting the proverbial golf course. It���s about being free to make difficult choices and follow your true north.

Finally, I���ve learned that we are in far less control of our finances and lives than we imagine. Instead, life is filled with randomness and chance. In investing, these forces can easily conspire to make or break an investment. But they can also bend the course of our lives in unpredictable ways. How many blessings in my life���financial or otherwise���were the result of dumb luck or divine grace? Plenty.

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

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A Dirty Business

ON MONDAY, MAY 2, I logged onto my Chase bank account���and discovered my balance was $992.43, many thousands of dollars less than I expected. My first thought: I���m going to get hit with a low-balance fee.

That, alas, should have been the least of my worries.

I clicked through to see the account details, and discovered that check No. 1126 had been made out to Milton Cherry for $7,000. But none of the writing on the check was mine, except the signature.

I had indeed written check No. 1126. But when I did so, it was made out to the City of Philadelphia for $123 and then stuck in the mail, along with my City of Philadelphia School Income Tax Return.

I soon learned of a phenomenon that, until that point, I���d been blissfully unaware: check washing. It seems there���s a group of criminals in the Philadelphia area who have been opening mailboxes, fishing out envelopes that appear to contain checks, altering those checks and then cashing them.

What followed were calls to Chase���s fraud department, the postal service���s investigation unit and the local police, followed by a visit to a local Chase branch to open a new checking account. Then began the arduous task of changing all automatic debits���think water, gas, electricity, internet���as well as one regular credit. I also had to link my new bank account to my Vanguard Group account and my Discover credit card.

That was followed the next week by two hours on the phone with Chase���s fraud department and then another visit to the local Chase branch. Further calls to Chase followed, trying to find out what was going on. All in all, countless hours were flushed away, which bothered me more than the loss of the $7,000, which I presumed would be temporary.

Sure enough, on June 10, Chase credited my account for the stolen $7,000. A happy ending? My faith in Chase has been solidified. But my faith in the postal service is shaken. Our relationship was already on rocky ground, thanks to the pandemic and the resulting delivery disruption, including some mail I sent that never made it to its destination.

Now, I���m just not sure I can trust the mail service. I���ve taken to walking to the closest post office and mailing letters there, rather than sliding them into the local mailbox. But even that seems risky. In my mind, dependable mail delivery is a hallmark of modern life, right up there with regular trash collection and reliable electrical service. It's a sad day when you can���t mail a birthday card and a check to your niece without fear your bank account will get emptied.

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Twelve Paradoxes

WHAT SEEMS TRUE about money often turns out to be false. That brings me to the financial paradoxes I���ve come across during my investing journey. Here are my top 12:

The more we try to trade our way to profits, the less likely we are to profit.
The more boring an investment���think index funds���the more exciting the long-run performance will probably be.
The more exciting an investment���name your latest Wall Street concoction, SPAC or anything crypto���the less exciting the long-term results typically are.
The only certainty is uncertainty and the only constant is change. Today���s market decline will eventually become a bull market, and today���s market leaders, such as oil companies, will eventually yield once again to tech stocks.
Big market trends play a huge role in our investment results, and yet trying to time macroeconomic cycles or guess which market sectors will outperform is a fool���s errand. Many big market rotations are set in motion by something wholly unanticipated, like a virus or a war.
To be happy when wealthy, we also need to be happy with far less money. The fact is, above a relatively modest income level, no amount of extra money will change our level of happiness. More money might even make us miserable, as many lottery winners have discovered.
The more we hate an investing trait���or any trait for that matter���the more likely it is that we���re resisting seeing that trait in ourselves. It���s what Carl Jung called the shadow���undesirable aspects of our personality that we hide from ourselves. Do you get irritated listening to people give unsolicited financial advice? There���s a good chance that you often give unsolicited financial advice but don���t like to admit it. For the record, I hate unsolicited financial advice and am never guilty of providing it.
The more we learn about investing, the more we realize we don���t know anything. We should just buy index funds and instead spend our time worrying about stuff we can actually control.
The more an investor is convinced he���s right, the more likely he is to be wrong. Short sellers, in particular, are likely to succumb to this mental trap. See Bill Ackman on��Herbalife, or David Einhorn and Jim Chanos on��Tesla.
The more options we have, the less satisfied we���ll be with each one. This is the paradox��of choice. Anyone who has spent hours ���optimizing��� his or her portfolio knows this all too well. Its close cousin is information overload, another frustration when investing.
The more afraid we are of losing money, the more likely we are to take unwitting risks that lose us money. Sitting in cash seems wise during market selloffs. But the truth is, none of us can reliably time the market. Pull up any chart of the stock market over any period longer than a decade and you���ll see that the riskiest decision is sitting in cash, which gets destroyed by inflation.
The more we think about our investments and look at our financial accounts, the more likely we are to damage our results by buying high because of greed and selling low because of fear. It can pay to look away.

I���ve come to appreciate these paradoxes not because I am wise. I���m not. Rather, I have come to appreciate them because I���ve made every single one of these mistakes���some of them on multiple occasions.

John Goodell is general counsel for the Texas Veterans Commission. He has spent much of his career advocating for military and veterans on tax, estate planning and retirement issues. His biggest passion is spending time with his wife and kids. Follow John��on Twitter @HighGroundPlan��and check out his earlier articles.

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Parting Advice

HALF OF THE COLLEGE students I taught last semester just graduated. A few are going on to graduate school, but most are starting accounting, finance or other business careers. For my classes with a heavy concentration of seniors, I reserve the last five minutes of the final class to give them a few career tips. In keeping with my overall teaching approach, I keep the message simple: Do what you enjoy.

Now, this isn���t the usual ���follow your passion��� pitch you hear in so many commencement addresses. In fact, I start by saying that most of us won���t follow our passion. Often, it isn���t practical to do so. Because we can���t all be passion-driven, we need to find ways to make our day-to-day work enjoyable. I encourage my graduates to find ways to incorporate things they enjoy into their career. There are two specific tips I share.

First, I recommend graduates use their skills to enter an industry that interests them. Many students have ���dream��� industries they���d like to work in, such as sports, not-for-profits and life sciences. But most judge it too difficult to land a job in these industries, so they apply to businesses that don���t excite them.

To be sure, graduates with technical majors���think accounting and information technology���may have an easier time getting their foot in the door of a preferred industry. But all graduates have skills, such as problem solving and communication, that are useful in any industry. If you have a genuine interest in an industry, I believe you should make putting your skills to work in that industry your focus. The fact is, if you���re working in your ���dream��� industry, chances are you���ll be more successful and more fulfilled.

Second, I encourage graduates to prioritize doing things they enjoy at work. These things might not be specifically related to your day-to-day responsibilities. Instead, they might include things like recruiting new employees from your alma mater, leading training sessions or working on special projects. It could even include organizing the company���s sports teams. Assuming you do these things well and they don���t detract from your core duties, you���ll be viewed favorably by your manager and your peers���and you���ll likely enjoy your job more.

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Off the Treadmill

WHEN WE AIM for financial independence, what we���re usually trying to do is to convert our current work time into future free time. We exchange our time and labor for money today. The wealth we accumulate then buys us a future that���s free from labor.

Given this exchange of labor for future freedom, what���s the most efficient way to speed our progress? According to a research paper, ���Capitalists in the 21st Century,��� the best strategy is to own a business.

The study, which analyzed federal tax returns, found the most statistically probable way to reach the top 0.01% of U.S. income is to own a business with pass-through income, such as a law firm, investment firm, medical office or auto dealership. Such business owners make up 84% of taxpayers in the top stratum of income.

This makes sense. Each of us converting our present work time to future free time can���t achieve massive scale. We cannot duplicate ourselves or our labors. When we own equity in a business, however, profits may come from the work of others. Business owners achieve economies of scale using other people���s time.

Most of us aren���t going to own a share of a law firm or auto dealership. Fewer still will found a major company, as did Jeff Bezos of Amazon, Sara Blakely of Spanx, Robert Johnson of BET Network, Whitney Wolfe Herd of Bumble or Amar Bose of Bose. Most of us are going to be good old W-2 employees���working stiffs���or, as the Japanese say, a ���salaryman.���

We can stick to being the proverbial ���man (or woman) in the gray flannel suit,��� but that simply puts us on a treadmill. We sell our present time for money, which���in 1950s style���we���d deposit in a savings account, where it would be slowly devoured by inflation. We would convert our present work time into future free time at a glacial pace.

Is there a better way? Yes. To bypass the treadmill and get on the autobahn of wealth creation, workers should own shares of businesses���in the form of publicly traded companies. My choice is an index fund based on the S&P 500.

Every month, I convert some of my work time into stock of 500 leading public companies, as chosen by Standard & Poor���s. I get to leverage the brains and production of millions of workers around the world to create my future free time.

Large-cap U.S. stocks have returned about 10% a year, on average, over the past century. This means we can potentially double our money���or future free time���approximately every seven years.

Before we get too excited, though, we need to understand the risks. For starters, only 4% of stocks have powered the majority of U.S. stock returns since 1926. Good luck picking those 4% on your own.

On top of that, share prices are prone to crashing. The S&P 500 has a jarring 20% fall every four years, on average. Sure enough, that's what we've seen this year. The market also sees a troubling 30% drop, on average, every nine years.

As I tell my children, the price of admission to this stock game is emotional pain and suffering. If we can���t stand the heat, we shouldn���t bother entering this kitchen. Because���and this is crucial���we need to stay in the game. Always. If we cannot, we will lose our money quickly and often.

According to this really cool video from Dimensional Fund Advisors, if we���d invested $1,000 in an S&P 500 index fund in 1990, we���d have had $20,451 by the end of 2020���providing we stayed the entire 30 years. If we missed the best-performing single day because, say, we got spooked during a 10% correction, we���d have $18,329. What if we missed the best 25 days because we thought we could time the market? We���d have just $4,376.

What we know from research is that the best way to get wealthy is through business ownership, but finding the very best stocks is really hard. We���re looking for a needle. What should we do? Just buy the entire haystack, keep buying more every month���and then hang on for the ride of our lives.

Tanvir Alam has been practicing corporate law for more than two decades, but you shouldn���t hold that against him. He lives in New York���s Hudson Valley with his patient wife and two skeptical teenagers. Tanvir is interested in personal finance and travel, and is trying desperately to become a runner. Follow him on Twitter @Docket75, read his blog at StealthWealthBlog.com��and check out his earlier��articles.

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