Jonathan Clements's Blog, page 282

Qualifying for Care

A NEIGHBOR WAS recently telling me about the increasing amount of care he and his wife have to provide to his 90-year-old mother-in-law, and the challenges and expenses he expects in the near future.

I was able to offer some advice���because this is an area where my wife and I have significant experience. Together, we took care of her parents and mine, both medically and financially. If this is something you���re experiencing, or may soon, you would do well to learn about the six activities of daily living. The six ADLs are generally recognized as:

The ability to clean yourself and perform grooming activities like shaving and brushing teeth.
The ability to get dressed by yourself without struggling with buttons and zippers.
The ability to feed yourself.
Being able to either walk or move from a bed to a wheelchair and back again.
The ability to get on and off the toilet.
The ability to control your bladder and bowel functions.

Long-term-care (LTC) providers use ADLs as a measure of whether assistance is required and how much help is needed. To qualify for Medicaid nursing home benefits, the state may do an assessment to verify that an applicant needs assistance with ADLs. Other state programs may also require that an applicant be unable to perform a certain number of ADLs before qualifying for assistance. In addition, LTC insurance usually uses the inability to perform two or more ADLs as a trigger to begin paying on a policy.

On top of all that, ADLs play a significant role in determining whether you can take a tax deduction for the costs of an assisted living facility, such as a nursing home or a continuing care community. To deduct assisted living expenses, the resident must be considered "chronically ill." This means a doctor or nurse has certified that the resident either can���t perform at least two ADLs or requires supervision due to a cognitive impairment, such as Alzheimer's disease or another form of dementia.

In addition, for a resident of an assisted living facility to qualify for a tax deduction, personal care services must be provided according to a plan of care prescribed by a licensed health care provider. This means a doctor, nurse or social worker must prepare a plan that outlines the specific daily services the resident will receive. For further details, check out IRS Publication 502.

Usually, only the medical part of assisted living costs is deductible, while ordinary living costs���such as room and board���are not. If the resident meets the criteria above, however, room and board may be considered part of medical care and the cost may be deductible. The assisted living facility should provide you with a breakdown of costs.



What if you choose care at home rather than at an institution? Again, IRS Publication 502 provides the answer. In the ���nursing services��� section, the IRS says that nursing services at home are deductible, potentially including ���certain maintenance or personal care services provided for qualified long-term care.���

In my mother-in-law���s case, she had dementia and needed help with several ADLs. Luckily, she had the resources to afford a safe and comfortable facility. Her income included a small pension, Social Security, and dividends and interest. But given the huge costs of long-term care, her itemized deductions each year were roughly $40,000 higher than her taxable income.

Thanks to that $40,000 of ���extra��� itemized deductions, we were able to withdraw that sum from her remaining IRAs for a number of years and not owe any federal taxes. When her IRAs were drained, we sold taxable-account investments and realized some long-term capital gains���and again, thanks to her ���extra��� itemized deductions, there was zero federal tax. One caveat: A parent may still owe state taxes if the state government taxes retirement income or capital gains.

Planning for our own, or our parents���, elder years is one of the more challenging aspects of financial planning. My wife and I learned how important it is for adult children to talk openly with their parents about their wishes. Equally important, seniors should talk with their children while they still have all their faculties. Engaging an expert in elder law, especially for the nightmare that a Medicaid application presents, is also a great idea.

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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How to Lose Less

IF THERE���S ONE STORY that seems to have captured the investing public���s imagination this summer, it���s the��revelation��that venture capitalist Peter Thiel has managed to accumulate more than $5 billion in his Roth IRA���where it will be entirely tax-free to him.




In its reporting, ProPublica, the news outlet that carried the story, focused mostly on the tax aspects���the fact that Thiel was able to use his Roth IRA in such unusual ways. In my opinion, though, the more notable element of this story is simply that Thiel was able to turn an initial investment of just $1,700 into more than $5 billion. That was the hard part.




The tax strategy, on the other hand, wasn���t exactly simple, but it wasn���t so difficult, either. Stories like this, in fact, are a reminder that taxes are���to some extent���within our control. This is especially true when it comes to investment-related income.




We all know the basics of tax-efficient investing: asset location, tax-loss harvesting, charitable giving and, of course, using tax-advantaged accounts like Roth IRAs and 529s. I definitely endorse these strategies. But those aren���t the only ones. Here are three more to keep in mind:




Indexing.��When it comes to the active vs. passive debate, most people focus mainly on the performance advantage��of index funds. But there���s another key reason to steer clear of actively managed funds: taxes.




Here���s how the research firm Morningstar��summed��it up: ���Over the past five years, Morningstar���s Tax Cost Ratio���a measure of the reduction in returns from taxes on fund distributions���has averaged about 1.8% for U.S. equity funds,��� adding that, ���the return hit from taxes is nearly twice as large as that from annual expenses...���




To put that in perspective, the U.S. stock market���s average annual return has been about 10% historically���so that 1.8% represents a material drag. If you own an actively managed fund and are wondering whether to cut it loose, I recommend checking Morningstar for the fund���s Tax Cost Ratio, along with its turnover ratio and historical distributions.




Direct indexing.��As much as I recommend index funds and advise against stock-picking, individual stocks do carry one interesting benefit: They offer the potential to be more tax-efficient. To illustrate, imagine that 10 years ago a brother and sister each used their regular, taxable account to build a portfolio to track the S&P 500, but they went about it differently. The brother went the conventional route and bought an S&P 500 index fund.




Meanwhile, the sister bought all 500 stocks individually. Today, they would both be sitting on approximately 300% gains. But the brother���with the index fund���is in a tougher spot tax-wise. That���s because his shares (excluding those bought with reinvested dividends along the way) all have an identical gain of 300%, so most shares he sells would result in the same 300% gain. There would be no way around that.




The sister, on the other hand, has a much more complicated portfolio but also a lot more flexibility. That���s because each of those 500 stocks has fared differently over the past 10 years. Some have seen big gains, but dozens���GE, for example���have actually lost value. As a result, the sister can pick and choose which stocks to sell at any given time, giving her much more flexibility to control her tax bill.




Why am I talking about individual stocks? To be clear, I don���t recommend that anyone rush out and load up on stocks like this. I mention it, though, because index fund providers recognize the tax-related shortcoming of their products and are working on solutions. One such solution looks promising: It's called direct indexing. In a sense, it's like an investor's own personal index fund. This allows investors to capture the tax efficiency of individual holdings without the associated portfolio complexity.




Direct indexing also allows investors to tailor portfolios in ways that aren���t possible with conventional funds. You could, for example, buy most S&P 500 companies, while excluding those that run contrary to your values, such as tobacco companies.




Not surprisingly, two of the largest index-fund managers have acquired direct indexing companies. BlackRock��bought��a company called Aperio, and just last week Vanguard announced the��acquisition��of a firm called JustInvest. The cost of these services is still a little high. But as they expand, I expect prices will come down. This is a trend worth keeping your eye on.




Borrowing.��Ed��ward Mc��Caf��fery, a law professor at Uni��ver��sity of South��ern Cal��i��for��nia, uses the phrase ���buy-borrow-die��� to describe another tax strategy. This is how it works: Suppose you have a large portfolio of stocks held in a taxable account and need money for expenses. You could sell some of those investments, but that would trigger capital gains.




An alternative would be to borrow against your shares. When would you pay this loan back?��You wouldn���t. Instead, your estate would���after your death. Because of the step-up in cost basis on taxable account investments, your estate would be able to sell shares tax-free and pay off the loan at that point.






Mc��Caf��fery says that, ���Or��di��nary peo��ple don���t think about debt the way billionaires think about debt.��� But you hardly need to be a billionaire to employ this strategy. You do, however, need to be careful. First of all, borrowing rates vary widely from broker to broker.




Second, you don���t want to borrow too much. That���s because, unlike most other consumer loans, a broker can demand repayment if the market drops and your loan balance gets too high relative to the now-reduced value of your portfolio. In that situation, if you don���t have the cash to pay down the loan, the broker has the right to sell some of your investments. This is an ugly phenomenon known as a margin call and something you want to avoid. Finally, as always, taxes should be only one factor in any investment decision. In other words, don���t stick with an inappropriate portfolio just to save on taxes.




A further note on the buy-borrow-die strategy: Today in Washington, DC, legislators are debating a proposal to scrap the step-up at death that���s a key pillar of this strategy. If Congress does go that route, it would largely upend this strategy. But borrowing might represent a solution to��another��proposal being debated. If capital gains rates rise for high-income taxpayers, it would become more important to limit���or at least smooth out���your income from year to year.




Suppose you wanted to sell some of your investments to buy a new home. Under the proposed new system, there might be an incentive to spread those sales over a period of years to keep your income under each year���s new threshold for higher capital-gains tax rates. It���s an open question where this legislation ends up. But if it does pass as proposed, short-term borrowing might become a more valuable tax technique.




The bottom line:��For many people, ���tax time��� is when returns for the prior year must be completed. But I recommend flipping this script. Don't view tax time as solely an exercise in looking backward. Instead, take the opportunity to look forward, strategizing for future years. That way, you'll be able to look at your tax bill as something that���s controllable rather than inevitable.




A final note: I���ve gotten more than one question about Peter Thiel���s use of his Roth IRA to buy shares in startup companies. If you���re interested in this strategy, there are two important things to know. First, it���s actually not too difficult. You just need to work with a custodian that specializes in this. But second, you do need to tread extremely carefully. That���s because the IRS���s rules around this are very specific and the penalty for a misstep is severe. The IRS can disqualify an IRA, making the entire account taxable all at once. If you���d like to learn more, I recommend this detailed��writeup��by accounting expert Jeffrey Levine.

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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Ask the Question

THERE’S NOTHING that deters financial planning like a scarily large price tag.

We should ask ourselves all kinds of tough financial questions. But many of the toughest never get asked—because we know answering them will involve agonizing choices, difficult conversations and unthinkable amounts of dollars. Consider these four:

1. How would you cope if you were out of work for six months? As I’ve noted in earlier articles, the big financial emergency isn’t replacing the roof or the air-conditioning system, but rather losing our job. That’s why experts often advise amassing an emergency fund equal to six months of living expenses, knowing it could take that long to find a new job.

If you have that much cash socked away, congratulations, you’re in great shape. But most folks don’t. If a family pulls in $80,000 a year, it might need more than $20,000 to cover six months of living costs, and yet the Federal Reserve has found that 36% of families don’t even have enough cash to cover a $400 unexpected expense. That means that, if they’re hit with a spell of unemployment, most families are looking at unpalatable choices—slashing living costs, emptying retirement accounts, racking up credit-card debt and anything else that’ll put food on the table.

My advice: If you’re in the workforce, think about how you’d cover those six months of living costs, and consider whether there are steps you should take now to limit the potential financial damage. That might mean setting up a home-equity line of credit, identifying costs you’d immediately eliminate if you found yourself out of work, and—yes—perhaps socking away more cash.

You may not be able to amass a six-month emergency fund over the next year or two. But setting aside even a few hundred dollars every month can quickly add up, plus thinking about our financial goals in terms of monthly savings—rather than as a lump sum—can make them appear far less daunting.

2. How much can you help with college costs? According to the College Board, four years at an in-state university costs an average $89,000, including room and board, while private colleges cost an average $203,000—and both figures assume students finish within four years, which often isn’t the case.

If parents can help with college costs without imperiling their own retirement, I believe they should. But more important, I think parents should make it clear to their children exactly how much financial assistance they can offer—and they should have the talk no later than the start of high school. Kids deserve to know early on which colleges are affordable and which are out of reach.

Paradoxically, the less parents can afford to contribute, the more guidance they should offer. If a child wants to be a social worker or a teacher or (heaven forbid) a journalist, the parents need to steer the kid toward college choices that’ll involve little or no student loans, because it’s highly unlikely that the resulting career will make it possible to service significant amounts of debt.



3. How much retirement income will you realistically have? The 4% withdrawal rate is the subject of endless debate. But whatever its shortcomings, the 4% rule has one great virtue: It offers a quick-and-easy way to think about our retirement savings as retirement income. Got $100,000 in your 401(k)? That impressive sum doesn’t seem nearly so impressive when you think of it as $4,000 of annual retirement income, or just $333 a month.

With any luck, that realization won’t discourage retirement savers, but rather spur them to save even more. Ideally, it would also prompt folks to consider other steps that’ll boost their prospects of a financially comfortable retirement, like staying in the workforce for a few extra years, or working part-time in retirement, or opting for immediate fixed annuities so they squeeze more income out of the retirement savings that they have.

4. How would you pay long-term-care costs? Of all the elephants in the room, this is perhaps the biggest. According to Genworth, a private room in a U.S. nursing home costs an average of almost $106,000 a year, with costs in East and West Coast states often higher by 25% and sometimes much more. What if you spend your final five years in a nursing home? Depending on where you live, the tab could run $400,000 to $800,000.

This is not a pitch for long-term-care (LTC) insurance. I encourage you to check out Adam Grossman’s two recent articles, including the comments from readers. Premiums on traditional LTC insurance have been going through the roof and, to add insult to injury, it seems insurers make claimants jump through unnecessary hoops. How about falling back on Medicaid instead? Not only will you need to spend down your assets to qualify and you could end up in a mediocre facility, but also Medicaid, too, is an administrative nightmare. Maybe it’s no surprise that many folks don’t want to even think about LTC.

But think about it we should. Perhaps we should play the Medicaid game and give away our assets long before we need nursing home care. Perhaps we should buy one of the new hybrid LTC policies, where premiums should remain fixed, though submitting a claim will still mean running the insurance company gauntlet. Perhaps we should move into a continuing care retirement community while we’re still in good shape—which might mean a big down payment and a high monthly fee, but it should also allow us to avoid hefty nursing home costs down the road. Or perhaps we should just save like crazy and aim to self-insure.

Don’t like any of these options? My advice: Spend time pondering the question—and decide which is the most palatable of the unpalatable choices.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:

What estate planning missteps should you strive mightily to avoid? Drawing on decades of experience, attorney Robert Port offers nine crucial lessons.
"I turned around and saw two men in ski masks pointing guns at me," recounts Don Southworth. "I thought it was a joke. When they ordered me to crawl over to the safe, I knew they were deadly serious."
Long-term-care insurance is hugely expensive. How can you hold down the cost? Adam Grossman talks about which features to ask for—and where to cut corners.
Jiab Wasserman is always looking for a bargain. But when she tried to open a checking account at Citi—and snag a $700 signup bonus—she took the hunt for savings too far.
What's the best way to spend money? Joe Kesler sings the praises of travel, which can open our eyes to new ideas and other ways of living, while also making us grateful for the home we have.
For years, Sonja Haggert and her husband have been picking stocks and bonds together. How do they keep things civil? Sonja offers five pointers.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

The post Ask the Question appeared first on HumbleDollar.

He Says She Says

MY HUSBAND AND I have been selecting investments together for years���and we���re still married. How have we gotten along for decades without killing each other?

Our investment discussions revolve mostly around individual stocks and bonds. They constitute the bulk of our investments and take up the bulk of our time. We own everything from small amounts of risky stocks like Immutep (symbol: IMMP) to blue chips like Johnson & Johnson (JNJ) and 3M (MMM). Riskier stocks involve a lot of back and forth, while our discussions about blue chips are quick and easy. After all, what���s not to love about a dividend aristocrat���those stocks that increase their dividend every year?

We get recommendations on funds from our financial advisor. Those are also easy discussions because the parameters we set up are clear. For instance, our advisor recently suggested a closed-end fund that looked good to us because the fees were low, it invested in municipal bonds���something we���re lacking���and the credit quality and distributions looked enticing. Problem is, the fund���s shares were selling at a premium to the fund���s net asset value, which is its portfolio value on a per-share basis. We agreed to continue watching the fund and buy when it was at a discount.

Sometimes, our decisions take an especially long time. Consider bitcoin. We���d been talking about adding cryptocurrency to our portfolio since 2017. During a seminar in 2018, we were introduced to the workings of cryptocurrencies by someone we respected. But we didn���t do anything. In 2019, we were reading about hyperinflation in Venezuela and hearing firsthand reports that bitcoin was being used to purchase goods and services. The buzz seemed here to stay. In January 2020, we finally decided to buy.



Let���s face it, when we make investment decisions, the stakes are high: Success or failure can determine our next vacation, whether we can afford college costs and how much we spend in retirement. How have my husband and I avoided coming to frequent verbal blows? I gave it some thought and huddled with my better half (don���t tell him I called him that). We agreed that these are the five strategies that have worked for us.

Settle on an investment approach. What are your criteria for buying a stock, bond, piece of real estate or cryptocurrency? Are you purchasing it as a short-term or long-term investment? What���s its role in your asset allocation? Be prepared to have a wonderful idea quashed because your partner reminds you it doesn���t fit with your investment strategy.
Have an exit plan. It���s important to have markers in place that���ll prompt you to pull the plug���without emotion. That marker could be a drop below some agreed-upon price, a dividend cut or a spinoff of part of the company. Alternatively, maybe you���ve been fortunate, doubled your money and agree that that���s the signal to get out.
Earmark money for speculative investments���those new technologies, medical breakthroughs or other risky bets that one or both of you can���t resist. My husband worked in the pharmaceutical field and he���s always looking for the next great medical discovery. He���s had winners as well as losers. We celebrate the winners. What about the losers? Because these speculative investments aren���t a big part of our portfolio, the losses are never large enough to start an argument.
Have a referee. No, not a neighbor or friend, unless he or she is knowledgeable. Instead, your referee might be your financial advisor, a website that you read consistently or an investment newsletter you follow. If these sources indicate that an investment is a buy or sell, that can be the deciding vote.
Be prepared to discuss and, yes, argue���but try to keep the arguments fact-based. We read numerous publications. We base our discussions around a simple checklist that guides our decisions. That, along with our overall strategy and a few newsletters we trust, have guided us over the years and helped us to get the results that we want. Have we always followed all the above points? Have we never had an argument about an investment product? No, we���re human. But the discussions are always thought-provoking���and they often lead to comments like, ���I didn���t think of that.���

Sonja Haggert is��the author of Invest, Reinvest, Rest. You can learn more at SonjaHaggert.com. Follow her on Twitter @SonjaHaggert��and��check out her earlier articles.

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Go Away

ONCE IT LOOKED SAFE to travel again, I didn���t waste any time. I jumped on a plane and spent three weeks in the Carolinas. It was a great vacation.

Staying in an Airbnb on Hilton Head Island gave me a much-needed chance to recharge while enjoying the beach. Renting a place on Lake Norman, the largest man-made lake in North Carolina, gave me quality time with two of my grandchildren. It was like breathing freedom again after the long COVID-19 lockdown.

That said, the trip wasn���t cheap. Is it wise to spend so much on travel? Imagine 70-year-old twins, Samuel and Joseph, sharing a cup of coffee and talking about their different life journeys. Samuel traveled the world. When he wasn���t working for the Peace Corps, he was vacationing in a new country. Meanwhile, Joseph rarely left the county where he was born, instead focusing on building his business.

Samuel doesn���t have much of a net worth, but he believes he���s lived a rich life. He can entertain others for hours with his travel stories, although he isn���t sure if his money will last into old age. Finances aside, he pities his twin for leading a sheltered life.

What about Joseph? He���s a prominent member of his community and is worth several million dollars. He is proud of the mark he���s made locally and enjoys his financial security. He wouldn���t change a thing about his life because of the legacy he���s built. He can���t understand how Samuel could end up at 70 years old without financial security.

Who lived ���the good life?��� I���ve known a lot of Josephs, who are rich financially but impoverished by their narrow understanding of the world. And I���ve known some Samuels, who have great stories to tell but worry about their lack of financial preparation for old age.

The middle road is the path many of us take. We budget as generously as possible for travel but also insist on saving 10% to 15% of our income for retirement. That seems like a good compromise. But what happens in years when money is tight? I was always wired to save, so travel was an easy budget item to cut. I was more of a Joseph than a Samuel.

But that changed after reading Mark Twain. Here���s one of his insights: ���Travel��is fatal to prejudice, bigotry, and narrow-mindedness, and many of our people need it sorely on these accounts. Broad, wholesome, charitable views of men and things cannot be acquired by vegetating in one little corner of the earth all one's lifetime.���

A trip I took to South Africa opened my eyes to what Twain meant. I saw firsthand what life was like in an orphanage full of kids whose parents had died of AIDS. It gave me new compassion. Similarly, moving to Montana at age 50 opened me up to a whole new way of thinking about conservation of our resources. You just won���t get that perspective in the cornfields of Illinois. Even spending six months in an active retirement community in Tucson, Arizona, provided keen insight into the needs of older folks. Twain was right. Travel changes us.



Travel can also create gratitude. How many times have you heard others say they enjoyed their international travels, but it made them appreciate living in America, with our freedom and prosperity?

If I want to be thankful for my life in Montana, all I need to do is leave for several weeks. While I loved my recent East Coast experience, I hated driving down I-95, navigating the crazy traffic and road rage drivers. Give me Montana���where we have more cows than people.

But while I have come to appreciate the benefits of travel, I also know failing to plan for retirement can end in misery. How do we balance those goals? Here are three suggestions for travel in different seasons of life.

First, remember that the young are different from you and me: They can travel on a shoestring. My daughter educated me on "couch surfing." Basically, you download an app and have access to free housing. The father in me says, ���That���s dangerous.��� But so was hitchhiking when I was her age.

A safer alternative: Help our kids travel for a gap year before or after college. I didn���t figure this one out until my last child was that age. But it was probably the best year of her life, in part because she got to experience the developing world. I���ve come to believe it���s a great idea to travel before we get tied down by work and family responsibilities.

Second, if our career is in full swing, we shouldn���t just use our paid time-off for travel. Also consider getting a job that���ll take you to different parts of the country or the world. Military service has provided this alternative for years. Some civilian jobs also offer this perk.

If a job with travel isn���t available and you���re budget constrained, look into going abroad with a religious or nonprofit mission. These trips are often considered charitable work and folks pay for them by raising money. The trips can be short term and fit in with paid time-off. In many cases, they���re more rewarding than staying at a five-star resort.

Third, as we enter the golden age of retirement, take advantage of the opportunity to travel before health issues prevent it. As we age, there���s a risk we���ll get set in our ways. Travel can be a great antidote���helping us to keep an open mind to new ideas and the way that others live.

Joe Kesler is the author of Smart Money with Purpose and the founder of a website with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers.��Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe's previous articles.

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Choose Both

IT WAS A WARM MAY night in 1977. I was 19 years old and the manager of a fast-food restaurant. I was also in the middle of a five-year addiction to compulsive gambling that would eventually lead me to the brink of spiritual and financial bankruptcy. It was about 10:30 p.m. and I was cleaning up the store after closing. I was planning on going to the racetrack to catch the last race when I was done.

I was emptying the soft drink system when I turned around and saw two men in ski masks pointing guns at me. I burst out laughing���I thought it was a joke. When they ordered me to get down on the floor and crawl over to the safe, I knew they were deadly serious.

One of the men ordered me to empty the safe and put all the money in his bag. As I nervously loaded hundreds of dollars in coins into the bag, I noticed out of the corner of my eye that there was a paper cup sitting on my desk stuffed with about $400 in cash. The thought popped into my head that maybe he wouldn���t notice it and I could take it with me to the racetrack that night.

After I cleaned out the safe, he asked me, ���Is that all the money?���

As I tried not to look at the money on the desk, I replied, ���Yeah, that���s all the money.���

He put the gun to my head and said again, ���Is that all the money?���

I stuttered, ���Uh, there���s some more up there on the desk.���

Maybe his gun wasn���t loaded or maybe he was too nervous to realize that I had tried to pull something over on him. Instead of shooting me, he and his partner tied me up and ran off into the night. I didn���t make it to the racetrack that night. I didn���t realize until many years later, after I quit gambling, how close I came to losing my life over my perverted sense of money.

Hopefully, you haven���t faced such an experience when it comes to choosing your money or your life. But I know that all of us make choices about our money and our life. These choices may not be forced upon us by the cold steel of a gun, but they are forced on us every day. Our choices range from deciding how to live on what we make to deciding how much time to spend earning a living versus being with family and friends. Some of us struggle with deciding how long to stay at jobs that provide us with economic security but leave us feeling empty and unfulfilled.

Some of us are simply looking for a job���any job. Many of us wonder how we can help those less fortunate as we struggle with deciding how much is enough. Whatever choices we are faced with, the question of our money or our life is never far away.



Most of the financial advice we read focuses on how to manage our money and how to do our best to have enough. This is important and I would be in a much less privileged place if I hadn���t availed myself of such advice. But too often, there���s silence from the experts, and among ourselves and those closest to us, about the grip money might have on our psyches and souls.

Jacob Needleman writes in his book Money and the Meaning of Life, ���The problem of money dogs our steps throughout the whole of our lives���. And it haunts our spiritual search as well.��� So it does. Needleman believes that exploring and healing our relationship with money provides us our greatest opportunity for learning how to live a rich and satisfying life. I agree with him. But how do we do that?

I���ve begun to understand that, above all else, money is a story���a myth���that I���ve learned from others and continue to create myself. Reflecting on our stories about money is an important step in building a peaceful relationship with money. What lessons did we learn as children about money? Are those lessons relevant for how we wish to live today? These are questions we would all be wise to reflect on���hopefully with others.

My story was greatly influenced by being raised in a single-parent household where money was sometimes scarce. My mom was so busy working to keep our family together and worrying if we had enough money that she didn���t have time for the spiritual side of life. I���ve struggled with creating a story of money that balances security with the spiritual, with having enough for my family and to share with others. Like most myths, there���s both truth and fantasy in our money stories. One of our challenges is to discover which parts of our money stories no longer work for us.

When I became a minister, I learned that money���perhaps not too surprisingly���has its roots in religion. The word ���money��� is named after the Roman Goddess of Warning, Juno Moneta, whose temple housed the very first mint. What a wonderful metaphor for money, the fact that it���s named after the Goddess of Warning and the first mint. Perhaps, in addition to ���In God We Trust,��� every dollar bill should come with the phrase, ���Warning: This Can Be Dangerous to Your Spiritual Well-Being���.

All the world���s religions share stories and wisdom about money. But some of these stories and this wisdom force us into a false dualism that chooses the material or the spiritual. Knowingly or not, financial advisors and experts often do the same. This can force us to choose our money or our life.

My 19-year-old self couldn���t have imagined the life that would unfold in front of him: overcoming addiction. Coping with financial and emotional bankruptcy. Learning how to savor life and money while endeavoring to help others do the same. We shouldn���t wait for a gun to be pointed at us���or for hard times���to reflect on the role we want money to have in our material and spiritual life. Instead, we should think about it now���and strive to choose both our money and our life.

Don Southworth is a semi-retired minister, consultant and tax preparer living in Chapel Hill, North Carolina. He recently completed his Certified Financial Planner education.�� Don is passionate about the intersection between spirituality and money, and he encourages people to follow their callings wherever they lead.��Follow Don on Twitter @Calltrepreneur ��and check out his earlier articles.

The post Choose Both appeared first on HumbleDollar.

Time Not Well Spent

MY RELATIONSHIP with money is complicated. I want to get the best value for our dollars, so I spend a lot of time comparison shopping. Other people hunt for bargains. I go on long safaris.

My frugality and comparison shopping have served Jim and me well. In our double-income household, we managed to save 50% of our combined pay���basically living on one income and saving the rest. That, coupled with some lucky breaks, propelled us to early retirement.

Going from saving for retirement to spending in retirement, however, brings with it a shift in mindset. You become less focused on getting the most from your dollars���and more focused on getting the most from your time. Yes, you still want to save money, but you need to balance that against the time and effort involved.

That brings me to our retirement income plan. We have five years of living expenses in cash investments, so we can sleep at night without worrying about short-term stock market performance. But cash, of course, pays almost nothing these days, so I���m always looking for the best deal I can.

Until recently, I conducted those searches from Spain, where we spent the first three years of our retirement until our recent move back to Dallas. To open new financial accounts in the U.S., we needed a U.S. address. To that end, like many expats, we rented a virtual mailbox. That gave us a physical address in the U.S., plus 24/7 access to our mail, all from the convenience of a laptop or smartphone. (This is different from a P.O. box from the postal service.)

In the past few years, using our virtual mailbox address, I opened two new travel credit cards in the U.S. to earn mileage. That gave us enough promotional airline points to pay for roundtrip flights from Spain to both the U.S. and Thailand. I also used the address to open high-interest savings accounts with Customers Bank, Salem Five Bank and TIAA Bank. All this required relatively little time and effort���a few hours to search the internet and a few more hours to set up the new account and transfer the money electronically.

Last November, however, I took the hunt for savings too far when I opened a Citi Priority checking account. Citi offered a $700 cash bonus for new customers if they maintained a balance of at least $50,000 for 60 days, equal to an annualized return of more than 8%. I transferred $1,000 to open the new Citi account and planned to transfer another $50,000 within 30 days.



The bank���s account opening process was relatively easy and, as with all our other accounts, I used our virtual address. A few weeks later, I got an email from Citi saying it needed proof of my physical address and my identity. But without waiting for my response, Citi froze my account and sent it to ���new account fraud.���

After several phone calls with wait times that often lasted more than an hour, as well as text messages over several weeks, Citi admitted that it had caused the problem. It had violated the Patriot Act by opening my account without first validating my identity and address.

I sent the bank a copy of my passport and driver���s license, along with a receipt showing that it was indeed me who paid for the virtual mailbox. But Citi still refused to unfreeze my account. After a few months of back and forth, I requested that Citi close my account and return my money the same way it had received it���by electronic bank transfer. Citi refused.

A representative told me that Citi could only return the money by sending a check to a residential address and not to my virtual mailbox, even though I had provided proof that I owned the mailbox. I ended up filing complaints with the Office of the Comptroller of the Currency and with the Consumer Financial Protection Bureau. I finally got my initial deposit mailed to my virtual mailbox���seven months after I opened the account.

My experience was hardly unique. I discovered many other Citi Priority customers had faced similar situations. Citi either froze or closed their accounts, and then refused to return their money or refused to deposit the $700 promo incentive.

We all have limited time and money. I���m mad about the $700 I never got. But mostly, I���m mad about the time I���ll never get back.

Jiab Wasserman, MBA, RICP��, has lived in Thailand, the U.S. and Spain. She spent the bulk of her career with financial services companies, eventually becoming vice president of credit risk management at Bank of America, before retiring in 2018.��Head to Linktree to learn more about Jiab, and also check out her earlier articles.

The post Time Not Well Spent appeared first on HumbleDollar.

Courtside Seat (III)

EVERYTHING I KNOW about estate planning I learned in court.

As part of my litigation practice, I represent parties���often warring family members���involved in disputes over wills, trusts and family businesses. These disputes have common themes that teach important lessons about financial planning in general and estate planning in particular.

Driving these disputes is the enormous transfer of wealth���trillions of dollars���from the Greatest Generation to their children, grandchildren and great-grandchildren. Couple that wealth transfer with other demographic trends, such as longer life expectancies, rising health care costs and blended families, and disputes can easily erupt.

Lesson No. 1: Yes, You Need a Will.

A will or, in the right circumstances, a trust��expresses your intentions about what will happen to property when you die. If you die without a will, your state���s laws dictate how your ���probate estate������property without a beneficiary or survivorship designation���is divided up. That usually means a minimum share to a surviving spouse and the remainder divided among children or, if you have no children, to your parents and siblings.

No matter how much you wanted to leave money to, say, your church or a close friend, there���s usually no way to enforce that desire without a valid will. If you outlive your immediate family members and don���t have a will, your property might end up going to a distant relative you never knew.

If you have minor children, a will can also identify who you want to be their guardian if you die. Without a will, a court proceeding���with the potential for prolonged and expensive disputes���might be necessary to determine who becomes their guardian and who controls any property they inherit as minors.

Lesson learned: Spend the time and money to have a competent attorney review your situation and prepare appropriate estate planning documents, and then revisit them periodically. The laws of each state vary, so the estate plan or trust created by your cousin in Florida might not make any sense���and could be invalid���if you live in Montana. Don���t be penny wise and try do-it-yourself estate planning forms or software. There���s a high probability that what you create on your own may not be valid or has ambiguities that might need to be resolved in court. The money you think you���re saving will be more than eaten up by the attorneys��� costs necessary to sort things out.

Lesson No. 2: Yes, You Need Other End-of-Life Legal Documents.

A financial power of attorney, a power of attorney for medical issues and an advance directive for health care lets you identify who���ll make important financial and health decisions if you���re incapacitated and gives directions to those folks. Without these documents, if you become incapacitated, no one has the authority to make those decisions on your behalf, and a court proceeding will be necessary to name a guardian or conservator. Sometimes, there���s a family dispute over who that should be, usually because of concerns about the competency or integrity of the person proposed.

Lesson learned: When preparing a will, most attorneys will also recommend that other end-of-life documents be prepared. Make sure you follow through on these suggestions.

Lesson No. 3: Keep Your Beneficiary Designations Updated.

Increasingly, the disposition of property isn���t governed by a will, but by beneficiary designations on bank accounts, brokerage accounts, retirement accounts and life insurance, as well as by survivorship rights (think real estate held with right of survivorship). This property is known as non-probate property. If there���s no beneficiary designation or an incorrect designation for non-probate assets, the assets will become part of your probate estate and be distributed as your will directs or, if you don���t have one, as state law directs.

Lesson learned: Make sure beneficiary designations are accurate. For instance, have you correctly named a charity? A gift to the ���Breast Cancer Foundation��� might generate a dispute over whether you intended to give to the Breast Cancer Research Foundation or the American Breast Cancer Foundation. Do you have a backup charity if your original charity no longer exists when you die? That���s something that happens relatively frequently with small charities, churches and synagogues.

Lesson No. 4: Make Sure the Person Holding Your Power of Attorney Can���t Abuse that Power.

Estate planners recommend having a financial power of attorney (POA), which allows someone else to act on your behalf as your authorized agent. That can be invaluable if actions need to be taken when you���re physically or mentally incapacitated, or otherwise not able to act. The POA ends upon your death.



Problem is, a POA in the hands of the wrong person can wreak havoc on your finances and your estate plan. With a broad POA, an unscrupulous agent can sell, transfer, gift or borrow against your assets and property. He or she might change the beneficiary designations on life insurance, retirement plans, and bank and investment accounts. He or she might also defeat your estate plan by selling heirlooms or property that you want to go to specific individuals, or decide to limit spending on your needs so there���ll be more for heirs. That is why a POA is often called ���the most effective burglary tool since the crowbar.���

Lesson learned: Consider limitations on the powers granted, such as prohibiting gifts to the agent or his or her family. Also require periodic reporting to a third party of actions taken under the POA or require the consent of your attorney or accountant for certain transactions, such as the sale of any asset worth more than a specified sum. Alternatively, you might appoint a professional licensed and bonded fiduciary as your authorized agent.

Lesson No. 5: Be Careful with Joint Accounts.

To enable a child or trusted friend to help with bill paying, a senior will often open a joint account with that person. Usually, however, the law provides���and the terms of the account stipulate���that on the death of one of the joint account holders, the survivor becomes the account���s sole owner. If the account holds substantial assets, that might be contrary to the senior���s wishes.

Lesson learned: If you want to open an account that another person has access to for the convenience of paying bills, most financial institutions will simply present the paperwork for a joint account. Instead, ask to open an account with a power of attorney designation. The power of attorney will end at your death, and the account���s assets will then be disbursed as you direct in your beneficiary designation or, if there���s no beneficiary named, according to your will.

Lesson No. 6: Elder Financial Abuse Is More Common Than You Think.

The news often has sensational stories of celebrities who suffer financial abuse at the hands of family, friends or financial advisors. Actor Micky Rooney, philanthropist Brooke Astor and Stan Lee, co-creator of Marvel superheroes, were all victims. But abuse isn���t confined to the wealthy and famous.

A 2010��Investor Protection Trust��survey that found one in five Americans over age 65 had been victims of financial fraud. A 2011��MetLife Mature Market Institute��study determined this sort of financial exploitation costs seniors at least $2.9 billion a year. About half of fraud was perpetrated by strangers, while family, friends and neighbors accounted for a third of financial abuse.

The elderly are targeted for many reasons: isolation and loneliness, diminished cognition and financial insecurity. They���re often very trusting and financially unsophisticated. And, of course, managing finances can be complicated, so an offer to ���assist��� or ���help��� is often accepted.

Elder financial abuse can take many forms. A senior might be coerced into making gifts or paying someone���s debts. A senior could also be coerced into changing his or her will, trust or insurance for the benefit of one child or a caretaker. To compel such actions, the influencer might isolate the elder, withhold care or deny access to friends unless the senior agrees.

Lesson learned: Remain vigilant to signs of potential abuse. Is the parent prevented from visiting with or speaking with friends and family? Has one sibling moved in with the parent and now controls who the parent sees and what he or she does? Has the sibling, caregiver or neighbor made recent purchases of cars or gone on expensive vacations?

It���s especially difficult for out-of-state children to monitor these situations. A request that a government agency, such as Family Protective Services, makes a wellness visit can sometimes help���but it can also exacerbate the situation. Not only will the caregiver be defensive, but also the elder might conclude that his or her independence is being challenged. That reaction can be heightened if a legal proceeding is filed to try to secure a guardianship or conservatorship. If the adult child requesting the guardianship or conservatorship fails to secure it, the relationship with the parent can be irretrievably damaged and the child might be disinherited.

Lesson No. 7: Your Trust Is Only as Good as Your Trustee.

Trusts are not just for the uber-wealthy. A properly structured trust can reduce or eliminate the need for probate, which is especially helpful in those states where the probate process is time-consuming and expensive. A senior who doesn���t have the desire to manage his or her assets���or is losing the ability to do so���might put them in a trust to be managed by a child, financial advisor or professional trustee. Trusts can also be useful in ensuring that significant assets aren���t put in the full control of a young adult. For example, a trust might provide that its assets are distributed at three different times: one third when a child reaches age 35, one third at 40 and one third at 45.

Selecting the right trustee is crucial. The trustee must follow the terms of the trust and is required to act as a ���fiduciary,��� meaning the trustee must make decisions that are solely in the beneficiary���s best interest. Disputes often arise because trustees mismanage trust assets; commingle their assets with trust assets; invest the trusts assets in their own business ventures or other high-risk investments; fail to provide any regular accounting; ���borrow��� from the trust and then are (surprise) unable or unwilling to repay the loan; and refuse to use the trust assets as directed for the care and benefit of named beneficiaries.

Lesson learned: Select a trustee who understands what it means to be a fiduciary. Often, a co-trustee is named. If you do so, provide for a tie-breaking procedure if the trustees can���t agree. Make sure you name successor trustees in case the original trustees resign, become incapacitated or die. Give direction on how the trust���s assets are to be managed, particularly if the trust has a controlling interest in a business. For any meaningful trust assets, consider a professional corporate trustee. His or her fees will be a fraction of what might be spent if litigation is necessary to remove an unscrupulous or negligent trustee and recover damages.

Lesson No. 8: Even Though Your Divorce Is Behind You, Your Financial Entanglements Might Not Be.

The demographic trends show many more people are on their second, third or even fourth marriages. Surprisingly, while the number of divorces among younger people has held steady, the divorce rate for those 55 and older has increased.

Once a divorce is granted, many people fail to follow up on important financial matters. Have you changed the beneficiary designations on your life insurance, 401(k) and brokerage accounts? Many states��� laws direct that, upon a divorce, the beneficiary designation of an ex-spouse is disregarded. But what if you live in a state that doesn���t do so?

Another common dispute is failing to maintain life insurance that a divorce settlement requires for the benefit of minor children. Do you have a copy of the policy? Are you monitoring whether your ex is paying the premiums so the policy won���t lapse?

Lesson learned: Yes, you want out of the marriage, presumably as soon as possible. But make sure you have done what���s necessary to limit future financial disputes with your ex or your children. Change beneficiary designations. Get copies of all insurance policies that are required to be maintained.

Lesson No. 9: Being Part of a Family Business Can Be Wonderful���Until it Isn���t.

According to Forbes, some 90% of U.S. businesses are family-owned or controlled by a family, and family businesses account for over half of U.S. economic activity. But remember the adage ���shirtsleeves to shirtsleeves in three generations���? The vast majority of family businesses don���t survive to the third generation.

Often, the business structure of a family firm is designed for tax reasons, with little thought given to management after the founder���s death. Who will run the company upon the founder���s demise? The absence of life insurance, payable to the company on the death of the founder, can cause cash-flow problems that doom the company.

Many family businesses have no corporate governance documents���no shareholder agreements, operating agreements or partnership agreements���that spell out what happens when a family member dies or wants to dispose of his or her interest in the business. Can one family member force the others to buy his or her interest at fair value, or is the family tied together indefinitely? If such documents exist, what happens when family members owning equal shares are deadlocked over an important business decision?

When a business is passed to the next generation, the child chosen to take the parent���s role may feel entitled to the same compensation as the parent who created the business. That can cause resentment among other siblings who also work in the business. A further cause for resentment: Family members who inherit an ownership interest, but don���t work in the business, can be entitled to a share of profits. Disputes are common between children who work in a business and children who don���t, because the former often think the latter are unworthy of sharing in the company���s profits.

Lesson learned: Business continuation planning, including consideration of life insurance needs, is critical. Make sure proper shareholder agreements, operating agreements or partnership agreements take into account intergenerational succession.

Robert C. Port is a partner with the Atlanta law firm of Gaslowitz Frankel LLC . He is fascinated with understanding how people deal with and manage money, especially the emerging field of behavioral finance. When not in a courtroom or before an arbitration panel, he prefers to be cycling, skiing, hiking or swimming. His previous articles were��Courtside Seat��and Courtside Seat (II).

This article is for informational purposes only, and should not be relied upon as���and does not constitute���legal advice. You should not act upon any information in this article without first seeking legal counsel from someone licensed to deliver advice in the relevant jurisdiction, and who understands your individual facts and circumstances.

The post Courtside Seat (III) appeared first on HumbleDollar.

How to Choose

A FEW WEEKS BACK,��I discussed some of the��challenges with traditional long-term-care (LTC) insurance: In addition to steep and rising premiums, these policies are complex. Many policyholders have to contend with an annual renewal letter that presents a mind-numbing matrix of options.

But there���s more to it than that. Long-term care is also an emotional topic. There���s the expression that personal finance is more personal than it is finance. I���ve been reminded of that over the past few weeks, as a number of people have contacted me to share their stories about long-term care. Some have described frustrations with these policies, including rising rates and bureaucratic obstacles to making claims.

Meanwhile, others have hailed LTC policies as lifesavers for their families. As one person put it, it���s been hard enough to manage the health challenges of her husband���s disability. But with LTC coverage, at least they've been spared financial stress, which would have made a bad situation that much worse. As challenging as these policies can be, they can also be immensely valuable.

These days, it���s much��harder��to find a standalone LTC policy. That���s because, as I mentioned in my earlier article, insurers got the pricing wrong when these policies became popular in the 1980s. For that reason, if you have an older policy, it���s often worth trying to maintain it. But if you have to compromise at renewal time to minimize premium increases, this is how I would think about the choices. You could also use this as a guide if you���re shopping for a new policy.

Daily maximum.��This is the fundamental element of an LTC policy. I���ve seen benefits that vary widely���from just $100 a day to more than $400. That���s an awfully wide range. Here are the factors I���d consider as you zero in on an appropriate coverage level:

Cost of care in your area. Christine Benz, Director of Personal Finance at Morningstar, compiles a set of LTC��statistics each year. That���s the best starting point for getting a handle on the cost of care. As you���ll see, costs vary widely from region to region. A private room in a nursing home in New York, for example, costs nearly three times what it costs in Louisiana.
Health outlook. No one has a crystal ball. But as you get older, this is one area where you have an information advantage relative to the insurance company.
Marital status. If you���re married or you have children nearby, they may be able to help you later in life, thus reducing your need for paid care.
Also if you���re married, it���s important to note a difference between the needs of men and women. Because husbands tend to be older than their wives and because women, on average, live longer than men, men are generally less able to provide care for their wives than the other way around. This shows up in the Morningstar statistics as well. Women account for nearly 70% of residents in long-term-care facilities and their stays are 70% longer. If you have to choose, you'd want to buy more coverage for a woman than a man.
LTC poses the biggest challenge for people who are in the middle financially. If you���re of very modest means, Medicaid might pick up the cost of long-term care. If you���re very wealthy, you likely wouldn���t have a problem paying the tab yourself. My recommendation: Use the statistics referenced above to estimate the cost for a multi-year stay in a long-term facility in your area. Then ask yourself how feasible it would be to cover that cost yourself.

Inflation protection.��Some LTC policies include inflation protection that���s generous by today���s standards���as much as a 5%-a-year increase in benefits. But this option will make a policy materially more expensive. My advice: If you���re on the younger side, inflation protection is worth paying for. But if you���re older, you might forgo that option since, for better or worse, there are fewer years of inflation to worry about.

Coinsurance.��Some policies offer a coinsurance option, whereby the policyholder would share the cost of care with the insurer. In exchange, the premium would be lower. Who would this help? If you look at the statistics, you���ll notice that only a small fraction of seniors incur costs in excess of $250,000���numbers range from��9%��to��15%. Coinsurance would be a good option for many families in the financial middle���who might be able to afford $200,000 of care, but not $2 million.



Elimination period.��This refers to the period of time before benefits kick in. Most policies have a relatively short elimination period of 100 days. But this is an area where you might compromise. Unfortunately, there���s no such thing as an LTC policy that provides a multi-year elimination period. I think that���s unfortunate because, according to Morningstar's Benz, that's just the type of coverage many people say they want���basically, catastrophic coverage. Insurers would like to offer it, but Benz notes that insurance regulators won���t let them. Absent that, the best you can do is to choose the longest elimination period an insurer offers.

Benefit period.��This one is tricky. According to the statistics, the average long-term-care claim is about three years. But that figure is distorted because many policies cap the benefit period. As a result, policyholders contending with these caps try to wait as long as possible���and probably longer than they���d like���before claiming benefits. In other words, the average claim would be longer if insurance policies didn't have these caps.

My advice: Try not to compromise on the benefits period. This would protect you in the case of a protracted illness. An added benefit: Premium payments cease the moment you claim benefits. If you have a long or unlimited benefits period, you could claim benefits��and��stop paying premiums as soon as you qualify for even a modest level of care.

If you don���t have a long-term-care policy, what are your options? As I noted, it might not be a problem if you have assets that are either very modest or very substantial. But even if you fall in the middle, all is not lost. First of all, the statistics say you might not need paid care at all. About��50%��of people don���t. And if you do, you might be able to��afford it��out of pocket.

Beyond that, Christine Benz suggests some other strategies: If you have home equity, you could plan on a reverse mortgage. If you have a whole-life insurance policy or an annuity, an intriguing option is to��swap it��for a hybrid life-LTC policy using what���s known as a 1035 exchange. There is, of course, no magic bullet. But it���s worth making a plan. That way, you���ll be ready if the need arises.

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.

The post How to Choose appeared first on HumbleDollar.

Keeping Our Heads

WHAT WORRIES ME? It isn���t the stock market, but rather stock market investors.

Despite all the hand-wringing, this doesn���t strike me as an especially dangerous time to own stocks. Corporate earnings are rapidly recovering from last year���s economic shutdown���not exactly a scenario where you���d expect a big stock market decline. Meanwhile, bonds and cash investments are offering scant competition for investors��� dollars, which is another reason to be bullish on stocks.

But even if the overall market appears no riskier than usual, there���s a danger that we���ll put ourselves in financial peril���by falling into one of these three behavioral finance traps.

1. Overconfidence. As financial markets rise, so too does our confidence. There���s nothing like making great gobs of money to make folks think they���re smarter than they really are. What if their results are mediocre compared to the market averages? Investors are often blissfully unaware���and simply assume they���re beating the market.

One indicator of our collective overconfidence: Average daily stock market trading volume in 2020 and 2021 has been running 63% above 2019���s level. When investors trade, it���s typically a sign they feel they know what they���re doing. But all that trading is costly. Sure, we might not pay a commission when we buy and sell stocks. But we still lose money to the bid-ask spread, the slight difference between the price at which we can currently purchase a stock and the lower price at which we can sell.

Even more worrisome, overconfidence can lead us to make big, undiversified investment bets. For some, those big bets will pay off handsomely���but, for most, the result will be market-lagging returns. How can I be so sure? Almost every year, the stock market averages are skewed higher by a minority of stocks that post spectacular gains, leaving most stocks with market-lagging performance. If we aren���t lucky enough to own the big winners, we���re destined for subpar returns. This is a reason to own total market index funds, which ensure we own all stocks, including each year���s superstars.

2. House money effect. Overconfidence can lead us to make risky investment bets. Adding fuel to this fire: the house money effect. What���s that? Think of casino gamblers who get lucky early in the evening. They now feel like they���re ahead of the game and playing with the house���s money���and that can prompt them to make even bigger bets.

The same thing happens with investors. After the spectacular U.S. stock returns of the past decade, many investors are financially far ahead of where they expected to be. The danger: They figure they can afford to take yet more risk by, say, dabbling in individual stocks or taking a flier on cryptocurrencies���and those bets could come back to haunt them.



Over the past year, we���ve seen a variation on the house money effect, and I suspect it���s especially prevalent among newbie investors. Their surprise windfall came not from the market, but in the form of stimulus checks and lower spending during the pandemic. They���ve taken this ���found��� money and started dabbling in meme stocks, dogecoin, Tesla and goodness knows what else.

Two decades ago, I fell prey to a similar phenomenon. In the late 1990s, I received $8,000 when my father cashed in a life insurance policy on which I was a co-beneficiary. Emboldened by both this windfall and that era���s euphoria, I strayed from my usual indexing strategy and used that $8,000 to buy four individual stocks. One company got taken over at a handsome premium. Two performed okay. And one plunged almost overnight���and I bailed out when the stock was down some 80% from my purchase price and on its way to zero. I haven���t owned an individual stock since, except a few hundred shares of my last two employers.

3. Extrapolating returns. Last year, many investors crowded into some of the market���s highest fliers, including Peloton Interactive, Netflix and��Tesla, only to see these stocks struggle in 2021. In many cases, it seems folks were buying these stocks simply because they���d gone up and they naively assumed those gains would continue.

But these days, investors don���t just chase performance. They also flock to the internet to loudly proclaim their devotion and get encouragement from others, all this leading to dangerous herding behavior. For instance, earlier this year, the higher cryptocurrencies climbed, the more virulent supporters became���only to fall almost silent during the recent rout. This phenomenon even infects staid value investors. These folks have been notably quiet in recent years. But with value outperforming growth in 2021, those whose portfolios have a value tilt are more likely to mention it in public.

Some degree of investment conviction is a good thing. It helps us to stick with our portfolio when markets turn rough. But we shouldn���t let conviction morph into blind loyalty. Today, folks will defend their favorite investments with a fervor usually reserved for a local sports team or a preferred political party. But no undiversified investment deserves that sort of undying love.

As I mentioned in an article earlier this year, thanks to the market���s efficiency, there���s no reason to think professional investors will be any more successful than amateurs at picking winners. Instead, I believe the hallmark of professional investors���as well as prudent amateurs���is that they think more about risk.

We���ve seen the S&P 500 climb 16% this year, ignoring dividends. But we���ve also seen some much-ballyhooed investments badly stumble, with Tesla down 27% from its high, bitcoin off 48% and ARK Innovation ETF down 21%. The lesson: The market giveth���but, if we behave foolishly, it���s all too easy to see those gains taken away.
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HERE ARE THE SIX other articles published by HumbleDollar this week:

"A coach I worked with asked me how things were going," recalls Don Southworth. "My team wasn���t doing too hot and I wasn���t doing too hot, either. After a few minutes, she said, 'Ah, you're being your results'."
Want to reduce the risk that a cyber-thief empties your financial accounts? David Powell offers a five-step protection plan.
"For retirees, what matters isn���t the size of their nest egg, but the lifestyle it can support���and I fear $1 million won���t support the lifestyle it once did," writes Aaron Brask.
When the McClatchy Company filed for bankruptcy last year, that put at risk Greg Spears's small pension from his time as a newspaper reporter. Here's what happened next.
Dennis Friedman likes to hide cash around the house���but he doesn't like it sitting in his portfolio. Sound odd? Dennis explains his thinking.
"One of the reasons our economy has been a success is our acceptance of failure," says Joe Kesler. "If��bankrupt entrepreneurs are��excessively punished, they may give up on high-return opportunities."

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.

The post Keeping Our Heads appeared first on HumbleDollar.