Jonathan Clements's Blog, page 23

ETFs versus Assets Under Management

Hired a  financial advisor who has claimed to be fee-only for a plan as we are 2-5 years away from retirement.  Wanted help with projections but especially with two areas:  amount and timing of conversion to Roths and 2.  real estate as we contemplate a new or second place.   Worried I received an annuity salesperson/asset manager in disguise as the first recommendation is to "simplify" our 401ks (almost all in Schwab target ETFs) with the creation of two funds---one actively managed (presumably by them) because they "can do better" and the other to a Prudential Flex Guard account.   One criticism of ETFs they have made is:
"Expense Impact:
Funds can add an unnecessary layer of
expense, as opposed to direct ownership of
securities through separately managed
accounts.
In addition to the fees, the clients could run
the risk of embedded cap gains that
precede their ownership. When securities
significantly appreciate, managers will
rebalance portfolio positions and taxable
gains may be realized by the investor."

I understand there is a relatively low cost to manage these ETFs but had not heard of the cap gains issue.

And as far as the FlexGuard product---are not target date funds managed to hedge as they get closer to the target date?

 

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Building a Secure Retirement, 10 Years at a Time.

In an earlier article, I described my unexpected decision to use fixed-term immediate annuities (FTIA) to form a floor for my expenses over the next ten years. I thought you might find it of interest if I expand on this, relating to the balance of our income needs and how this might play out over the longer term. To be clear and upfront this strategy is “Prioritizing Income Generation Over Capital Preservation” but not in a reckless way and could change over each 10 year block. My modelling suggests a 40 year time frame with average returns would be achievable at our inflation adjusted spending levels and still leave portfolio legacy considerations.

My FTIA provides an initial 65% of our needs, declining as a percentage as inflation takes its toll over the time frame. The inflation adjusted 35% top up to this (to include inflation adjusting the original 65% FTIA) is going to come from a combination of after tax cash and pre-tax short term bonds to manage tax band issues. Equity holdings may also be used if they exceed my spreadsheet performance projections of 2% real returns. This in my mind is a form of liability matching in so far as I'm matching low volatility assets to future consumption needs over a ten year time frame. I see no need to deviate from this basic liability matching strategy over the following ten year block. I realise not everyone may have the resources to do so.

The details may be different; it's unknowable at present if FTIAs or other short term products will offer value, but it will definitely be something I research closer to the time. By the time the second ten year block is implemented, social security for both of us and a small defined benefit (DB) pension Suzie has will have kicked in to provide a large percentage of our floor income. This aligns with my base premise that extreme long term planning is useful but paradoxically useless at the same time. While the broad brush stroke of a plan is required, the granular more short-term detailing needs a different strategy to be implemented closer to the time and offers a better likelihood for success.

My journey into fixed-term annuities and a tiered income strategy illustrates, in my opinion, a powerful blend of security and agility. By establishing ourselves a guaranteed floor for essential expenses Suzie and I mitigate immediate market risks, while our flexible top-up and equity component allow for both inflation adjustment and upside participation. This iterative, 10-year block approach isn't about perfect foresight but about intelligent adaptation. It does commit us to proactive planning, combined with a readiness to research and adjust to future realities which might become bothersome as we age. But I think it offers a robust path to sustained financial well-being in our retirement without pinning the flag to any one overarching strategy.

As I stated in the original article, personal finance is indeed personal and everyone's circumstances are unique. We should all endeavor to formulate a strong, flexible plan, including emergency liquidity, to give us the best chance in an uncertain economic world. My plan is flexible, letting Suzie and myself change direction if required, which gives us peace of mind. It's also partially driven by a recognition of Suzie's much more conservative risk outlook compared to mine. A financial compromise as such, that is like so much in a successful marriage, mindful of the needs of each other. A humble human plan for us.

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Got Momentum?

While I am satisfied with my current investments and have not made any significant changes in several years I do occasionally evaluate alternatives.  I recently read a Morningstar article titled “Top-Performing Stock ETFs of the Quarter”.  Most had higher expenses than I would be comfortable with.  But several were low-cost, including Invesco S&P 500 Momentum ETF SPMO at 0.13% expense.  This ETF tracks the S&P 500 Momentum Index.  This got me looking into what “momentum” investing was all about.  I downloaded a fact sheet and momentum methodology document from the spglobal web site.  I skimmed through the methodology document but frankly it only confirmed that I do not know what I do not know.  But the performance of the SPMO ETF kept me looking.  The recent performance has been outstanding, with a more than 45% return in 2024, which has continued into this year.  And when compared to a standard S&P 500 fund the downside is better (it lost less than 11% in 2022 compared to the S&P 500 loss of 18%).  But for most it’s almost 10 year history the index and ETF tracked the S&P 500 providing only slightly better returns.  But, about a year and a half ago the momentum strategy seemed to diverge and is now returning significantly better returns.  The question is why?  Has the strategy been improved?  Is it now AI controlled?  I have not found answers.  At this point I am not ready to make any changes, especially since after more than 18 months of above normal performance it could be close to topping-out.  I am wondering what the HumbleDollar community thinks about momentum investing and why it seems to be doing so well right now.

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Bankruptcies in continuing care

From the Wall Street Journal this morning: More than 1,000 families have lost a total of at least $190 million in 16 bankruptcies at continuing-care retirement communities since March 2020, according to a Wall Street Journal analysis. Chapter 11 filings rose during the pandemic period primarily because these facilities didn’t have enough new move-ins. And because of the way bankruptcy proceedings work, secured creditors get paid before residents.

I ended my online subscription to the WSJ a few months ago, so if a subscriber among HD readers could supply a gift-article link, it would be appreciated.

As a career-long newspaper journalist, I offer the information without taking a position on continuing care retirement communities. But both my wife and I have/had a parent with dementia resulting in years-long stays in assisted living and memory care, so I pay close attention to the debates about long-term care and long-term care insurance. One parent had LTC insurance; one does not. Thankfully, both had more than enough savings to cover their costs.

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Quinn is intrigued by the Lamborghini-style of managing money

A recent Kiplinger article lists ten questions to ask your financial advisor. This one caught my eye.

“6. Check out what car the adviser drives.

Hope that Lamborghini in the parking lot belongs to the doctor next door, not your adviser. A car can indicate how the adviser deals with his or her own money, and that will influence how they will approach managing your investments. “Clients don’t want to see you driving sports cars,” says Richard Rosso, director of financial planning at Real Investment Advice. “I manage myself frugally… I drive a Toyota hybrid. It lasts forever, and it’s safe.”

Being the contrarian, could it just be the adviser is a great investor, a good advisor with lots of clients?🤑. Would you have more confidence if your advisor is a frugal, very used, car buyer?

Frankly, I’d be more worried if the Lamborghini belonged to the doctor who either charges high fees and/or provides a large number of health care services, neither of which is an indication of better quality. 

While a Mercedes is many steps below a Lamborghini, it sure isn’t representative of how I (mostly) manage investments- and as many HD readers frequently observe, it’s not particularly well. 

By the way, a Lamborghini starts at around $230,000 and goes up to $700,000 with add ons up to an additional $100,000. 

NOW, that’s my kind of financial advisor. 

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Bond Conundrum

With passage of the most recent Federal legislation the Congressional Budget Office projects another 3.5 trillion dollars added to the US debt over the next 10 years. The inevitable result of this will be the Federal Reserve having to increase interest rates.

In 2022 this scenario resulted in a bloodbath in my intermediate bond fund. I don’t remember in my copious reading any advanced warnings of prices dropping precipitously as interest rates increased (in fairness I had read about the inverse relationship between prices and yields, just no warning as to just how bad it could be). Since then I have converted all the money that was in my intermediate bond fund to short term ETFs to shorten my bond funds’ duration and thus limit any future damage from rising rates.

My question is do any Humble Dollar readers have any other suggestions as to how to get a decent return on these monies other than depositing these monies into a Federal money market fund?

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Crab Fishing, Cold Beer and Your Portfolio 101

Crab Fishing, cold beer and your portfolio 101

While I was enjoying the simple sight of kids crab fishing at Portballintrae harbour, pondering the wisdom of a cold beer at the boat club, a sailing boat came into the harbour entrance. And just like that, I thought to myself:

A sailing boat is a tiny bit like a financial portfolio. The boat itself acts as the wrapper – your 401(k) or IRA – providing a protective structure. The passengers within are your valuable assets, held securely inside. Now, consider the sail: that's your stock allocation. This is where caution matters. Hoist too much sail, and a sudden market downturn, much like a financial storm, could spell significant trouble. Fortunately, there's the ballast, which represents your bond allocation. Get this balance right, and even in rough financial seas, you'll likely only encounter choppy waters, perhaps feeling a little "green" when you check your portfolio, but avoiding disaster.

But this brings up a crucial question: who's truly in control of this financial sailboat? Are you hiring a professional sailor to navigate these stormy seas, perhaps taking a high fee based on the number of passengers on board your boat? With such control, could they be sailing it in directions you never intended? Or are you an amateur sailor, doing your best to steer through unpredictable financial currents? The sooner you learn all you can about this financial craft—trimming the sail, loading the ballast, having the right compass to know your true north—the better equipped you'll be to guide it safely into the harbour. But be warned, there's many a financial wreck on the bottom of this choppy sea caused by overconfident amateur sailors. Seek advice when unsure, be humble.

But wait, we have one more task, and that's the hardest one of all: getting the assets out of our boat wrapper. Unfortunately dear reader, my imagination can't quite extend the metaphor to cover that because your circumstances are unique. And it's really annoying that I can't sail this analogy all the way into the harbor! However, this "decumulation" phase is arguably the most complex voyage of all. Unlike the accumulation phase based on growth, decumulation requires personalized strategies for withdrawing funds to last your unique journey, navigating crucial considerations like tax, income needs, and longevity. It's a journey where there's no single "right" chart, and advice or deep thinking becomes important . Still, I wish you fair weather and happy sailing.

Goodness,having an active imagination makes you thirsty and it took a while to commit this weird thinking to paper... I'm definitely having that cold beer now. All part of my well planned decummulating voyage of course!

The post Crab Fishing, Cold Beer and Your Portfolio 101 appeared first on HumbleDollar.

Crab Fishing, Cold Beer and your Portfolio 101

Crab Fishing, cold beer and your portfolio 101

While I was enjoying the simple sight of kids crab fishing at Portballintrae harbour, pondering the wisdom of a cold beer at the boat club, a sailing boat came into the harbour entrance. And just like that, I thought to myself:

A sailing boat is a tiny bit like a financial portfolio. The boat itself acts as the wrapper – your 401(k) or IRA – providing a protective structure. The passengers within are your valuable assets, held securely inside. Now, consider the sail: that's your stock allocation. This is where caution matters. Hoist too much sail, and a sudden market downturn, much like a financial storm, could spell significant trouble. Fortunately, there's the ballast, which represents your bond allocation. Get this balance right, and even in rough financial seas, you'll likely only encounter choppy waters, perhaps feeling a little "green" when you check your portfolio, but avoiding disaster.

But this brings up a crucial question: who's truly in control of this financial sailboat? Are you hiring a professional sailor to navigate these stormy seas, perhaps taking a high fee based on the number of passengers on board your boat? With such control, could they be sailing it in directions you never intended? Or are you an amateur sailor, doing your best to steer through unpredictable financial currents? The sooner you learn all you can about this financial craft—trimming the sail, loading the ballast, having the right compass to know your true north—the better equipped you'll be to guide it safely into the harbour. But be warned, there's many a financial wreck on the bottom of this choppy sea caused by overconfident amateur sailors. Seek advice when unsure, be humble.

But wait, we have one more task, and that's the hardest one of all: getting the assets out of our boat wrapper. Unfortunately dear reader, my imagination can't quite extend the metaphor to cover that because your circumstances are unique. And it's really annoying that I can't sail this analogy all the way into the harbor! However, this "decumulation" phase is arguably the most complex voyage of all. Unlike the accumulation phase based on growth, decumulation requires personalized strategies for withdrawing funds to last your unique journey, navigating crucial considerations like tax, income needs, and longevity. It's a journey where there's no single "right" chart, and advice or deep thinking becomes important . Still, I wish you fair weather and happy sailing.

Goodness,having an active imagination makes you thirsty and it took a while to commit this weird thinking to paper... I'm definitely having that cold beer now. All part of my well planned decummulating voyage of course!

 

 

 

 

 

 

 

 

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Effective vs. Marginal? Nah…..

Perhaps what we should be debating is which is the most important line on the tax return. I can tell you that most would say line 34, “this is the amount you overpaid, or line 37, “this is the amount you owe. I contend line 24 matters most, “this is your total tax”. Rarely, and I mean well under 1% of the time, did a client ask me how much tax they paid. As a matter of fact, if you ask the average person receiving a refund "how much tax did you pay", their response will be that they did not pay any tax. 

Of course, good arguments can also be made for lines 9 or 11, total income and adjusted gross income, because those lines can push you over a couple different cliffs if you stand too close to the edge.

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A major Medicare benefit just vanished

Key Medicare benefits are being stripped away, and patient care is being handed over to profit-driven corporations.

On June 25, 2025, in an unprecedented move, Dr. Mehmet Oz and Robert F. Kennedy Jr., through the Centers for Medicare & Medicaid Services (CMS), announced that Original Medicare will now require prior authorization for a list of 17 services.

This marks a major shift—and a serious rollback of a key protection retirees have relied on for decades.

What’s Changing?

Original Medicare was designed to give patients access to medically necessary care without a for-profit company standing between them and their doctor. If your doctor said you needed it, you got the care. No Prior Authorization.

Now, for the first time, CMS is launching a pilot program that uses third-party contractors to use prior authorization to review and approve services. These companies are paid based on how much money they save, which often means denying or delaying care.

What Services Are Affected?

So far, CMS has announced 3 of the 17 targeted services:

Knee arthroscopy for osteoarthritis
Electrical nerve stimulation devices
Skin and tissue substitutes

The remaining 14 services have not yet been disclosed.

A Move Toward Medicare Advantage Tactics

This mirrors the worst aspects of Medicare Advantage, where prior authorization is routinely used to block or delay care. One of the largest insurers, UnitedHealthcare, became infamous for their Prior Authorization strategy insiders described as:
“Deny. Delay. Defend.”

It Doesn’t Stop There

This isn’t the only rollback. The current administration also withdrew a proposal to allow Medicare to cover GLP‑1 weight-loss drugs like Ozempic, Wegovy, and Zepbound to treat obesity—a chronic condition that worsens health and drives up costs.

Covering these drugs could have improved health outcomes and reduced Medicare spending.

Why This Matters

Together, these actions represent a troubling trend:
Key Medicare benefits are being stripped away, and patient care is being handed over to profit-driven corporations.

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