Jonathan Clements's Blog, page 302
January 2, 2021
Our Report Card
I TURN AGE 58 today—and, a few days ago, HumbleDollar turned four. The good news: Only one of us is slowing down.
In 2020, HumbleDollar garnered 3.6 million pageviews, up from 2.6 million in 2019, 1.7 million in 2018 and 900,000 in 2017, which was our first year. Here’s a closer look at those numbers and what’s been happening here at HumbleDollar:
Earlier this week, I posted a list of the 20 most widely read articles from the past four years. If we ignore the traffic that goes to the three main navigation pages—the homepage, the main money guide page and the first articles page—those 20 articles have accounted for 9% of the site’s pageviews.
Some perspective on that number: Since HumbleDollar’s launch, the site has published around 1,300 articles, while our money guide runs to more than 500 web pages. Why have those 20 articles, which account for just 1% of the site’s pages, been so popular? In some cases, they enjoyed huge traffic because another, far larger website linked to the piece. I am, of course, grateful—but it does mean that a small but significant part of HumbleDollar’s success has hinged on the kindness of strangers with big online followings.
Every day, we publish at least one new article, so we’re putting out 30 or so pieces in a typical month. Yet, in the site’s stats, I regularly see the 80-20 rule brought to life. Just as 1% of the site’s pages has accounted for 9% of pageviews over the past four years, the same phenomenon occurs every month, with a few articles collecting a disproportionate share of the site’s traffic. If I were really smart, I would focus on publishing articles likely to get similar amounts of attention. But I am, alas, far from clairvoyant—and half the time I’m surprised by what proves popular.
During the stock market turmoil of early 2020, HumbleDollar often published two pieces a day, as we strove to help folks stay the course. You would think such market turmoil would be good for readership, right? Quite the opposite. It seems that, when the financial markets take our investments for a wild ride, we’d rather not look at our portfolios—and we’d rather not read about money.
Last year, more than 30 writers contributed articles to HumbleDollar. During the site’s four-year history, four writers have been notably prolific, with Adam Grossman at 172 articles, Dick Quinn at 94, Dennis Friedman at 72 and Kristine Hayes at 56. The site offers to pay contributors $50 per article, but many writers decline payment. In short, nobody’s getting rich working for HumbleDollar. Instead, the site’s writers are doing it because they have financial stories and insights they want to share, and which they hope will help others with their own financial journey.
Readers who post comments on HumbleDollar tend to be thoughtful and civil—a sharp contrast to the contentious cesspool found on so many sites, financial and otherwise. Yes, very occasionally, things spin out of control and I have to step in, but it’s only happened a few times over the past year.
Still, HumbleDollar’s comment section has two ongoing problems. First, many folks can’t figure out how to post comments. A refresher: You can either use your username and password from Facebook, Google (Gmail) or Twitter, or you can set up an account with Disqus, which provides the software we use for the comments section. To log in using any of those four methods, just click on the appropriate icon at the top of the comments section.
Second, I’ve noticed—as have some readers—that the comments directed at the site’s female writers tend to be more critical. I’m not sure what to do about this, but it concerns me, in part because I don’t want potential writers to be deterred.
While much of the site’s daily traffic goes toward new articles, the site’s backbone remains our comprehensive and continuously updated money guide. In addition to keeping the information fresh, we made some tweaks over the past year.
For instance, we introduced a new chapter devoted to basic financial questions, while also merging the saving and spending chapters. In the math chapter, we added a section explaining the difference between time-weighted and dollar-weighted returns. To the chapter devoted to big ideas, we added sections on present value and negative bonds. We also added two new sections to the great debates chapter, one on whether buying a home is a good idea and the other on the question of whether to invest or pay down debt.
More than 12,000 readers receive our free weekly newsletter, which goes out every Saturday morning. That number isn’t especially impressive, but your loyalty is: 65% or 66% of you open our newsletter every week, versus a 22% average for business and finance emails. Early last year, we also introduced a daily email that alerts readers to our latest articles.
In 2020, HumbleDollar received more than 600 donations. Those donations, coupled with a modest amount of advertising, are the site’s only two sources of revenue. The ads are served up by Google, with no input from me. Indeed, I don’t know in advance what ads will get displayed, which is a good thing, because it means there’s no way those ads could influence the stories we run.
To the best of my knowledge, no other financial website has our business model (if you can call it that). Unlike so many sites, we don’t accept sponsored articles or sponsored links. The latter involves linking to another site in return for payment. We also don’t have any affiliate marketing relationships, where we get a kickback if you click through to another site and open, say, a brokerage or credit card account. As smart consumers of financial information, I encourage you to ask how the sites you visit make money—because it could have a big influence on what you’re reading and what’s getting recommended.
I’ve come to think of HumbleDollar as a community—of writers who want to help others by sharing their stories, of readers who are drawn to the site by a common financial philosophy, and of donors who want to promote prudent money management. I may have launched this site, but it would be nothing without all of you. My profound thanks.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Isaac Cathey created a simple game to teach his five-year-old daughter about probability. She lost 30 cents—but learned five lessons that every investor needs to know.
"I’m going to focus my days more on living and less on investing," writes Dennis Friedman. "I’m going to enjoy my money instead of fretting about it. That’s my 2021 New Year’s resolution."
Not working can be hard work. Inflation is a worry. Financial emergencies still happen. Dick Quinn offers eight insights from his first decade of retirement.
What can we expect financially from 2021 and what should we do with our money? John Lim offers 10 predictions and recommendations.
Lesson No. 2: Market bubbles are tricky for lots of reasons—but mostly because no two look the same. Adam Grossman details five lessons to learn from 2020's stock market turmoil.
Readers have perused 8.8 million of HumbleDollar's pages over the past four years. Here are the 20 articles that have been most widely read.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook. Jonathan's most recent articles include What Money Can Buy, Time Limited and Long Time Coming.
In 2020, HumbleDollar garnered 3.6 million pageviews, up from 2.6 million in 2019, 1.7 million in 2018 and 900,000 in 2017, which was our first year. Here’s a closer look at those numbers and what’s been happening here at HumbleDollar:
Earlier this week, I posted a list of the 20 most widely read articles from the past four years. If we ignore the traffic that goes to the three main navigation pages—the homepage, the main money guide page and the first articles page—those 20 articles have accounted for 9% of the site’s pageviews.
Some perspective on that number: Since HumbleDollar’s launch, the site has published around 1,300 articles, while our money guide runs to more than 500 web pages. Why have those 20 articles, which account for just 1% of the site’s pages, been so popular? In some cases, they enjoyed huge traffic because another, far larger website linked to the piece. I am, of course, grateful—but it does mean that a small but significant part of HumbleDollar’s success has hinged on the kindness of strangers with big online followings.
Every day, we publish at least one new article, so we’re putting out 30 or so pieces in a typical month. Yet, in the site’s stats, I regularly see the 80-20 rule brought to life. Just as 1% of the site’s pages has accounted for 9% of pageviews over the past four years, the same phenomenon occurs every month, with a few articles collecting a disproportionate share of the site’s traffic. If I were really smart, I would focus on publishing articles likely to get similar amounts of attention. But I am, alas, far from clairvoyant—and half the time I’m surprised by what proves popular.
During the stock market turmoil of early 2020, HumbleDollar often published two pieces a day, as we strove to help folks stay the course. You would think such market turmoil would be good for readership, right? Quite the opposite. It seems that, when the financial markets take our investments for a wild ride, we’d rather not look at our portfolios—and we’d rather not read about money.
Last year, more than 30 writers contributed articles to HumbleDollar. During the site’s four-year history, four writers have been notably prolific, with Adam Grossman at 172 articles, Dick Quinn at 94, Dennis Friedman at 72 and Kristine Hayes at 56. The site offers to pay contributors $50 per article, but many writers decline payment. In short, nobody’s getting rich working for HumbleDollar. Instead, the site’s writers are doing it because they have financial stories and insights they want to share, and which they hope will help others with their own financial journey.
Readers who post comments on HumbleDollar tend to be thoughtful and civil—a sharp contrast to the contentious cesspool found on so many sites, financial and otherwise. Yes, very occasionally, things spin out of control and I have to step in, but it’s only happened a few times over the past year.
Still, HumbleDollar’s comment section has two ongoing problems. First, many folks can’t figure out how to post comments. A refresher: You can either use your username and password from Facebook, Google (Gmail) or Twitter, or you can set up an account with Disqus, which provides the software we use for the comments section. To log in using any of those four methods, just click on the appropriate icon at the top of the comments section.
Second, I’ve noticed—as have some readers—that the comments directed at the site’s female writers tend to be more critical. I’m not sure what to do about this, but it concerns me, in part because I don’t want potential writers to be deterred.
While much of the site’s daily traffic goes toward new articles, the site’s backbone remains our comprehensive and continuously updated money guide. In addition to keeping the information fresh, we made some tweaks over the past year.
For instance, we introduced a new chapter devoted to basic financial questions, while also merging the saving and spending chapters. In the math chapter, we added a section explaining the difference between time-weighted and dollar-weighted returns. To the chapter devoted to big ideas, we added sections on present value and negative bonds. We also added two new sections to the great debates chapter, one on whether buying a home is a good idea and the other on the question of whether to invest or pay down debt.
More than 12,000 readers receive our free weekly newsletter, which goes out every Saturday morning. That number isn’t especially impressive, but your loyalty is: 65% or 66% of you open our newsletter every week, versus a 22% average for business and finance emails. Early last year, we also introduced a daily email that alerts readers to our latest articles.
In 2020, HumbleDollar received more than 600 donations. Those donations, coupled with a modest amount of advertising, are the site’s only two sources of revenue. The ads are served up by Google, with no input from me. Indeed, I don’t know in advance what ads will get displayed, which is a good thing, because it means there’s no way those ads could influence the stories we run.
To the best of my knowledge, no other financial website has our business model (if you can call it that). Unlike so many sites, we don’t accept sponsored articles or sponsored links. The latter involves linking to another site in return for payment. We also don’t have any affiliate marketing relationships, where we get a kickback if you click through to another site and open, say, a brokerage or credit card account. As smart consumers of financial information, I encourage you to ask how the sites you visit make money—because it could have a big influence on what you’re reading and what’s getting recommended.
I’ve come to think of HumbleDollar as a community—of writers who want to help others by sharing their stories, of readers who are drawn to the site by a common financial philosophy, and of donors who want to promote prudent money management. I may have launched this site, but it would be nothing without all of you. My profound thanks.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
Isaac Cathey created a simple game to teach his five-year-old daughter about probability. She lost 30 cents—but learned five lessons that every investor needs to know.
"I’m going to focus my days more on living and less on investing," writes Dennis Friedman. "I’m going to enjoy my money instead of fretting about it. That’s my 2021 New Year’s resolution."
Not working can be hard work. Inflation is a worry. Financial emergencies still happen. Dick Quinn offers eight insights from his first decade of retirement.
What can we expect financially from 2021 and what should we do with our money? John Lim offers 10 predictions and recommendations.
Lesson No. 2: Market bubbles are tricky for lots of reasons—but mostly because no two look the same. Adam Grossman details five lessons to learn from 2020's stock market turmoil.
Readers have perused 8.8 million of HumbleDollar's pages over the past four years. Here are the 20 articles that have been most widely read.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook. Jonathan's most recent articles include What Money Can Buy, Time Limited and Long Time Coming.The post Our Report Card appeared first on HumbleDollar.
January 1, 2021
Do Nothing, Do Well
I MADE A SMART financial decision last year that netted me thousands of dollars. What’s so fantastic about this decision is that I didn’t have to do anything. I just sat back and let my investment portfolio do all the work.
If you did what I did and ignored the talking heads, and just bought and held a diversified mix of stocks and bonds, your investment portfolio performed well last year. Those who warned about investing in overvalued domestic stocks and low-yielding bonds might be right one day, but it wasn’t last year. For instance, in 2020 through Dec. 30, Vanguard Group’s Total Stock Market Index Fund had a total return of 20.4% and its Total Bond Market Index Fund notched a respectable 7.6%.
Last year was yet another example of why you should invest in broad-based index funds and then do nothing, except rebalance. Let those other investors waste time and effort trying to figure out which investments to load up on. Of course, every so often, they might get it right. But over the long haul, they’ll further and further behind the market averages.
I shouldn’t be boasting about my financial prowess. It took me years to figure this strategy out. It wasn’t easy for a guy like me. You might say I have a type “A” personality. I can be impatient, anxious, proactive and a workaholic. Those are not good qualities when it comes to managing money.
When you’re a long-term investor, patience is a virtue. When managing your investments, being less active is better than being more active. When assessing your ability to read the market’s direction, humility is a more valuable trait than overconfidence. These are some of the qualities that I strive for as an investor—qualities that support long-term investing rather than a knee-jerk reaction to the latest events roiling the market.
What’s so terrific about this strategy is that anyone can do it. All you have to do is accept that you aren’t smarter than the market. Just stay the course with a diversified portfolio of low-cost index funds whose asset allocation reflects your time horizon, tolerance for risk and financial goals.
When I think about why I became a more stable and patient investor, I believe it’s because I feel satisfied and secure with my financial life. I hardly ever look at my portfolio because there’s no need. I’m comfortable with where I am financially. There’s no burning desire to have more than I currently have. My portfolio is structured so that I’m not taking too much risk and yet there’s enough growth to keep up with inflation. I truly believe my wife and I are in a good place financially.
When I was younger, I looked at my investment performance on a daily basis, because I was amassing money and I wanted more. I even took stock market risks by, for instance, overweighting certain sectors. That’s not how I feel or behave today, and you shouldn’t, too.
As a retiree, I realize there are other things that are more important than accumulating more money than I’ll ever need. This pandemic has reminded me about my own mortality, including the importance of looking after my health and of making the most of the time I have left.
I’m not going to spend my remaining days preoccupied with the performance of my investment portfolio when it isn’t necessary. I’m going to focus my days more on living and less on investing. I’m going to enjoy my money instead of fretting about it. That’s my 2021 New Year’s resolution.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. His previous articles include Too Thrifty, Mother Knows Best and Live It Up. Follow Dennis on Twitter @DMFrie.
If you did what I did and ignored the talking heads, and just bought and held a diversified mix of stocks and bonds, your investment portfolio performed well last year. Those who warned about investing in overvalued domestic stocks and low-yielding bonds might be right one day, but it wasn’t last year. For instance, in 2020 through Dec. 30, Vanguard Group’s Total Stock Market Index Fund had a total return of 20.4% and its Total Bond Market Index Fund notched a respectable 7.6%.
Last year was yet another example of why you should invest in broad-based index funds and then do nothing, except rebalance. Let those other investors waste time and effort trying to figure out which investments to load up on. Of course, every so often, they might get it right. But over the long haul, they’ll further and further behind the market averages.
I shouldn’t be boasting about my financial prowess. It took me years to figure this strategy out. It wasn’t easy for a guy like me. You might say I have a type “A” personality. I can be impatient, anxious, proactive and a workaholic. Those are not good qualities when it comes to managing money.
When you’re a long-term investor, patience is a virtue. When managing your investments, being less active is better than being more active. When assessing your ability to read the market’s direction, humility is a more valuable trait than overconfidence. These are some of the qualities that I strive for as an investor—qualities that support long-term investing rather than a knee-jerk reaction to the latest events roiling the market.
What’s so terrific about this strategy is that anyone can do it. All you have to do is accept that you aren’t smarter than the market. Just stay the course with a diversified portfolio of low-cost index funds whose asset allocation reflects your time horizon, tolerance for risk and financial goals.
When I think about why I became a more stable and patient investor, I believe it’s because I feel satisfied and secure with my financial life. I hardly ever look at my portfolio because there’s no need. I’m comfortable with where I am financially. There’s no burning desire to have more than I currently have. My portfolio is structured so that I’m not taking too much risk and yet there’s enough growth to keep up with inflation. I truly believe my wife and I are in a good place financially.
When I was younger, I looked at my investment performance on a daily basis, because I was amassing money and I wanted more. I even took stock market risks by, for instance, overweighting certain sectors. That’s not how I feel or behave today, and you shouldn’t, too.
As a retiree, I realize there are other things that are more important than accumulating more money than I’ll ever need. This pandemic has reminded me about my own mortality, including the importance of looking after my health and of making the most of the time I have left.
I’m not going to spend my remaining days preoccupied with the performance of my investment portfolio when it isn’t necessary. I’m going to focus my days more on living and less on investing. I’m going to enjoy my money instead of fretting about it. That’s my 2021 New Year’s resolution.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. His previous articles include Too Thrifty, Mother Knows Best and Live It Up. Follow Dennis on Twitter @DMFrie.The post Do Nothing, Do Well appeared first on HumbleDollar.
December 31, 2020
Left Penniless
AS A PARENT, it’s my responsibility to teach my children good financial habits. Core among these are deferring gratification, saving diligently, giving generously and making sensible spending choices. I feel it’s also important to make my children aware of financial pitfalls. Succeeding financially—and in life generally—seems to be as much about avoiding self-destructive habits as it is about cultivating good ones.
My wife and I have been homeschooling our children for the last couple of years. Our attempt at home education has been a smashing success, thanks almost entirely to my wife. While she handles the bulk of the teaching, I do occasionally step in to teach certain concepts. Recently, I was tasked with helping my five-year-old daughter understand probability.
Seeing an opportunity to turn a dry academic exercise into a valuable life lesson, I designed a game for the two of us to play. In the game, I offered my daughter the opportunity to take money from her piggybank and quickly turn it into more money. To play the game, we needed 50 cents in pennies and a die (or dice for those who aren’t sticklers for proper English usage). The rules were simple:
To throw the die, you must pay one cent to the dealer (me).
Before throwing the die, you must guess how it will land (one through six).
If you’re wrong, there are no consequences beyond losing the initial penny paid.
If you’re right, you get five cents.
At first, my daughter was doubtful that this game would be any fun. I started her with 30 cents from her piggybank. After her first couple of throws, she’d lost a couple of cents. But before long, she guessed correctly and was rewarded accordingly. My reaction to her losses was muted—basically a subdued shrug. I struck a sympathetic tone and reassured her that the losses were but a temporary and inconsequential setback. Meanwhile, when she won, my reaction was boisterous and jubilant.
This commotion attracted the attention of her younger siblings, who gathered around her to observe the spectacle and take part in the celebration. When her balance temporarily hit 50 cents, I pointed out that today must be her lucky day. When I asked if she wanted to stop playing, claim her winnings and go do something else, she enthusiastically responded that she wanted to keep having fun making money.
Within a few minutes, her luck predictably turned and (to borrow a phrase from John Bogle) the relentless rules of humble arithmetic took over. As her balance fell below her original 30 cents, she set the goal of breaking even so she could walk away. Ultimately, this attempt failed within minutes and she was left penniless (pun intended). Interestingly, she asked me if she could take more money from her piggybank to try to make back her losses, but I decided it would be best to end the game and move on to the teachable moment. Here’s a summary of the lessons learned:
1. Probability. As requested by my wife, we discussed the probability of a correct guess on any one throw. After realizing that the odds were one-in-six, but her payout was only five cents, she concluded the game was rigged unfairly and that a fair payout would have been six cents. That lead to my next lesson.
2. Costs matter. While a statistically breakeven payout would have been six cents, she paid one cent for each throw, so her winnings were reduced by the cost of each transaction. Therefore, to break even, the payout would need to have been seven cents.
3. Psychological biases. We discussed the emotions she experienced during the game and how they guided her decisions. As a proud dad, it was humbling to recognize that my own child is susceptible to common human biases.
Recency bias. After each winning throw, and especially after consecutive winning throws, she felt confident that a trend was developing. Similarly, after a long streak of losing throws, she began to feel despair that her luck had run out.
Sunk cost bias. Once her balance dropped below the amount she started at, and her losses continued to mount, she doubled down on the possibility of returning to her original balance. This also demonstrates loss aversion.
Confirmation bias. Her siblings and I were very supportive of her successes and I praised her “skill” in accurately guessing how the die would land. When she correctly guessed three times in a row, she saw this as confirmation that she was indeed very skilled at guessing.
4. Skill vs. luck. I felt it was important to emphasize that, despite my praise for her die-rolling abilities, her instances of success were the result of dumb, random luck. Skills can be taught, learned and refined through practice. But if a strategy is solely dependent on chance, the player has surrendered any control over the outcome. I’ll need to revisit this theme when she’s old enough to invest.
5. Street smarts. The object lesson here is that, when a person or advertisement invites you to be part of an easy, fun, get-rich-quick scheme, you should be suspicious. In fairness to her, she obviously trusted me more than she would trust a stranger. Rest assured, I made it very clear that I needed to assume the role of a trickster to teach the lesson and, once our debrief was complete, I returned all of her money to the piggybank.
Clearly, some parental discretion is necessary for this to be a productive exercise. Before playing the game, I think a parent should consider whether the child is mature enough to understand the lessons it’s intended to teach. Also, if there’s any possibility that the child will mistake your feigned deception for a real breach of trust, it may be best to modify or avoid the game. In the case of my daughter, I believe that the principles she learned far outweighed her unpleasant experience of losing it all at the kitchen table “casino.”
Isaac Cathey is a public sector employee and professional pilot. The bulk of his financial knowledge comes from books by the likes of John Bogle and JL Collins. He spends his free time running, swimming, hiking, camping, biking with his children and doing DIY projects. His previous articles were Ode to a Civic, Debtors' Prison and Crash Test.
My wife and I have been homeschooling our children for the last couple of years. Our attempt at home education has been a smashing success, thanks almost entirely to my wife. While she handles the bulk of the teaching, I do occasionally step in to teach certain concepts. Recently, I was tasked with helping my five-year-old daughter understand probability.
Seeing an opportunity to turn a dry academic exercise into a valuable life lesson, I designed a game for the two of us to play. In the game, I offered my daughter the opportunity to take money from her piggybank and quickly turn it into more money. To play the game, we needed 50 cents in pennies and a die (or dice for those who aren’t sticklers for proper English usage). The rules were simple:
To throw the die, you must pay one cent to the dealer (me).
Before throwing the die, you must guess how it will land (one through six).
If you’re wrong, there are no consequences beyond losing the initial penny paid.
If you’re right, you get five cents.
At first, my daughter was doubtful that this game would be any fun. I started her with 30 cents from her piggybank. After her first couple of throws, she’d lost a couple of cents. But before long, she guessed correctly and was rewarded accordingly. My reaction to her losses was muted—basically a subdued shrug. I struck a sympathetic tone and reassured her that the losses were but a temporary and inconsequential setback. Meanwhile, when she won, my reaction was boisterous and jubilant.
This commotion attracted the attention of her younger siblings, who gathered around her to observe the spectacle and take part in the celebration. When her balance temporarily hit 50 cents, I pointed out that today must be her lucky day. When I asked if she wanted to stop playing, claim her winnings and go do something else, she enthusiastically responded that she wanted to keep having fun making money.
Within a few minutes, her luck predictably turned and (to borrow a phrase from John Bogle) the relentless rules of humble arithmetic took over. As her balance fell below her original 30 cents, she set the goal of breaking even so she could walk away. Ultimately, this attempt failed within minutes and she was left penniless (pun intended). Interestingly, she asked me if she could take more money from her piggybank to try to make back her losses, but I decided it would be best to end the game and move on to the teachable moment. Here’s a summary of the lessons learned:
1. Probability. As requested by my wife, we discussed the probability of a correct guess on any one throw. After realizing that the odds were one-in-six, but her payout was only five cents, she concluded the game was rigged unfairly and that a fair payout would have been six cents. That lead to my next lesson.
2. Costs matter. While a statistically breakeven payout would have been six cents, she paid one cent for each throw, so her winnings were reduced by the cost of each transaction. Therefore, to break even, the payout would need to have been seven cents.
3. Psychological biases. We discussed the emotions she experienced during the game and how they guided her decisions. As a proud dad, it was humbling to recognize that my own child is susceptible to common human biases.
Recency bias. After each winning throw, and especially after consecutive winning throws, she felt confident that a trend was developing. Similarly, after a long streak of losing throws, she began to feel despair that her luck had run out.
Sunk cost bias. Once her balance dropped below the amount she started at, and her losses continued to mount, she doubled down on the possibility of returning to her original balance. This also demonstrates loss aversion.
Confirmation bias. Her siblings and I were very supportive of her successes and I praised her “skill” in accurately guessing how the die would land. When she correctly guessed three times in a row, she saw this as confirmation that she was indeed very skilled at guessing.
4. Skill vs. luck. I felt it was important to emphasize that, despite my praise for her die-rolling abilities, her instances of success were the result of dumb, random luck. Skills can be taught, learned and refined through practice. But if a strategy is solely dependent on chance, the player has surrendered any control over the outcome. I’ll need to revisit this theme when she’s old enough to invest.
5. Street smarts. The object lesson here is that, when a person or advertisement invites you to be part of an easy, fun, get-rich-quick scheme, you should be suspicious. In fairness to her, she obviously trusted me more than she would trust a stranger. Rest assured, I made it very clear that I needed to assume the role of a trickster to teach the lesson and, once our debrief was complete, I returned all of her money to the piggybank.
Clearly, some parental discretion is necessary for this to be a productive exercise. Before playing the game, I think a parent should consider whether the child is mature enough to understand the lessons it’s intended to teach. Also, if there’s any possibility that the child will mistake your feigned deception for a real breach of trust, it may be best to modify or avoid the game. In the case of my daughter, I believe that the principles she learned far outweighed her unpleasant experience of losing it all at the kitchen table “casino.”
Isaac Cathey is a public sector employee and professional pilot. The bulk of his financial knowledge comes from books by the likes of John Bogle and JL Collins. He spends his free time running, swimming, hiking, camping, biking with his children and doing DIY projects. His previous articles were Ode to a Civic, Debtors' Prison and Crash Test.The post Left Penniless appeared first on HumbleDollar.
December 30, 2020
Ten Tips for 2021
‘TIS THE SEASON for making predictions and financial recommendations for the year ahead. Since everyone else is doing it, I figured I’d hop on the bandwagon. Here are my 10 predictions and recommendations for 2021:
1. The stock market will fluctuate, but company dividends will be relatively stable.
John Pierpont Morgan was asked what the stock market would do next. According to legend, he answered, “It will fluctuate.” If only financial experts were so truthful today.
There’s no doubt that stocks will fluctuate next year, perhaps wildly. I don’t pretend to know whether the market will end 2021 in the black or the red. But there’s one thing you can count on: Company dividends will be much more stable than share prices.
In the early 1980s, Nobel laureate Robert Shiller pointed out this phenomenon, noting that—since a stock’s value fundamentally reflects the present value of its future dividends—the wild stock price swings made little sense. Keep that in mind the next time the market throws a tantrum.
2. Wall Street forecasts will be bullish for 2021.
You can be sure of two things. First, Wall Street will be bullish on the stock market for 2021 (and 2022 and 2023…). After all, a COVID-19 vaccine is becoming available. Employment is recovering. There’s plenty of pent-up demand. The list is endless.
The other thing you can count on: The forecasts are worthless. In fact, they’re worth less than nothing. Acting on stock market predictions from Wall Street strategists or anyone else is a surefire way to lose money.
3. Short-term interest rates will remain very low in 2021.
It would usually be hazardous to predict the direction of interest rates. But the Federal Reserve has told us on more than one occasion that, in effect, “We aren’t thinking about raising rates. In fact, we aren’t even thinking about thinking about raising rates.”
The implication: Don’t expect to earn much from your savings account or money market fund in 2021. So why hold cash investments? I view cash not so much as an investment, but as financial valium and as an option on market volatility. As we saw earlier this year, cash can become quite valuable when investors panic. It could become valuable again.
4. Money will flow into the best-performing asset classes.
If there’s one thing you can count on, it’s that investors are always looking in the rearview mirror. What does this mean for 2021? More than likely, they will be selling value stocks and buying growth, while also dumping international stocks and plowing the proceeds into U.S. stocks.
Common advice from financial institutions is to invest about 25% of your stock market money internationally. That must mean the U.S. represents about 75% of global GDP, right? Just the opposite is true. The International Monetary Fund estimates that U.S. GDP is currently 25% of global GDP. But given the decade-long outperformance of U.S. stocks relative to the rest of the world, don’t expect most investors to give international shares a second look in 2021.
5. The more often you look at your portfolio, the worse your investment results will be.
Want to improve your portfolio’s performance in 2021? Stop checking your investments. The more often you look, the more often you’ll see losses. Even if you see losses half the time and gains the other half, the losses will weigh heavier on your psyche. Such myopic loss aversion has a host of ill effects, not least of which is a lower risk tolerance.
6. Life will not return to normal.
The news on the COVID-19 vaccine is encouraging. We may finally get a handle on the global pandemic in 2021. But don’t expect life to return to normal. For example, I doubt that the “work from home” trend is going away. I don’t pretend to know all the investment ramifications of these changes, but that’s okay, because no one else does, either.
7. Consider a partial Roth conversion.
Federal income tax rates remain near historic lows. If your taxable income is low next year—say you’re retired but haven’t yet claimed Social Security and aren’t yet required to take distributions from your retirement accounts—converting part of your traditional IRA to a Roth makes a lot of sense. If you have no other taxable income in 2021, you could convert $53,075 if you’re single and $106,150 if you’re married filing jointly, and stay within the 12% marginal federal tax bracket.
8. Get a guaranteed 100% return in 2021.
Contribute enough to your 401(k) or 403(b) to get the full employer match and that 100% return is yours, assuming your employer offers a dollar-for-dollar match. Kudos to the federal government’s Thrift Savings Plan (TSP) for recently implementing a 5% automatic enrollment percentage for new workers. As a result, new federal employees will get the full TSP match from the government, unless they opt out of contributing.
9. If you’re relatively healthy, sign up for a high-deductible health plan.
I was astonished by how much I could save by switching to a high-deductible health plan, which meant I was eligible to fund a health savings account—the most tax-favored investment account available today. Everyone’s situation is different and you need to run the numbers, but my analysis showed me saving nearly $7,000 a year through lower premiums and lower taxes. There’s always some uncertainty around such a decision, but the numbers were too compelling for me to ignore.
10. The price of bitcoin will remain volatile.
Some things are just self-evident.
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. His previous articles include Evasive Action, My Bad and Six Lessons. Follow John on Twitter @JohnTLim.
1. The stock market will fluctuate, but company dividends will be relatively stable.
John Pierpont Morgan was asked what the stock market would do next. According to legend, he answered, “It will fluctuate.” If only financial experts were so truthful today.
There’s no doubt that stocks will fluctuate next year, perhaps wildly. I don’t pretend to know whether the market will end 2021 in the black or the red. But there’s one thing you can count on: Company dividends will be much more stable than share prices.
In the early 1980s, Nobel laureate Robert Shiller pointed out this phenomenon, noting that—since a stock’s value fundamentally reflects the present value of its future dividends—the wild stock price swings made little sense. Keep that in mind the next time the market throws a tantrum.
2. Wall Street forecasts will be bullish for 2021.
You can be sure of two things. First, Wall Street will be bullish on the stock market for 2021 (and 2022 and 2023…). After all, a COVID-19 vaccine is becoming available. Employment is recovering. There’s plenty of pent-up demand. The list is endless.
The other thing you can count on: The forecasts are worthless. In fact, they’re worth less than nothing. Acting on stock market predictions from Wall Street strategists or anyone else is a surefire way to lose money.
3. Short-term interest rates will remain very low in 2021.
It would usually be hazardous to predict the direction of interest rates. But the Federal Reserve has told us on more than one occasion that, in effect, “We aren’t thinking about raising rates. In fact, we aren’t even thinking about thinking about raising rates.”
The implication: Don’t expect to earn much from your savings account or money market fund in 2021. So why hold cash investments? I view cash not so much as an investment, but as financial valium and as an option on market volatility. As we saw earlier this year, cash can become quite valuable when investors panic. It could become valuable again.
4. Money will flow into the best-performing asset classes.
If there’s one thing you can count on, it’s that investors are always looking in the rearview mirror. What does this mean for 2021? More than likely, they will be selling value stocks and buying growth, while also dumping international stocks and plowing the proceeds into U.S. stocks.
Common advice from financial institutions is to invest about 25% of your stock market money internationally. That must mean the U.S. represents about 75% of global GDP, right? Just the opposite is true. The International Monetary Fund estimates that U.S. GDP is currently 25% of global GDP. But given the decade-long outperformance of U.S. stocks relative to the rest of the world, don’t expect most investors to give international shares a second look in 2021.
5. The more often you look at your portfolio, the worse your investment results will be.
Want to improve your portfolio’s performance in 2021? Stop checking your investments. The more often you look, the more often you’ll see losses. Even if you see losses half the time and gains the other half, the losses will weigh heavier on your psyche. Such myopic loss aversion has a host of ill effects, not least of which is a lower risk tolerance.
6. Life will not return to normal.
The news on the COVID-19 vaccine is encouraging. We may finally get a handle on the global pandemic in 2021. But don’t expect life to return to normal. For example, I doubt that the “work from home” trend is going away. I don’t pretend to know all the investment ramifications of these changes, but that’s okay, because no one else does, either.
7. Consider a partial Roth conversion.
Federal income tax rates remain near historic lows. If your taxable income is low next year—say you’re retired but haven’t yet claimed Social Security and aren’t yet required to take distributions from your retirement accounts—converting part of your traditional IRA to a Roth makes a lot of sense. If you have no other taxable income in 2021, you could convert $53,075 if you’re single and $106,150 if you’re married filing jointly, and stay within the 12% marginal federal tax bracket.
8. Get a guaranteed 100% return in 2021.
Contribute enough to your 401(k) or 403(b) to get the full employer match and that 100% return is yours, assuming your employer offers a dollar-for-dollar match. Kudos to the federal government’s Thrift Savings Plan (TSP) for recently implementing a 5% automatic enrollment percentage for new workers. As a result, new federal employees will get the full TSP match from the government, unless they opt out of contributing.
9. If you’re relatively healthy, sign up for a high-deductible health plan.
I was astonished by how much I could save by switching to a high-deductible health plan, which meant I was eligible to fund a health savings account—the most tax-favored investment account available today. Everyone’s situation is different and you need to run the numbers, but my analysis showed me saving nearly $7,000 a year through lower premiums and lower taxes. There’s always some uncertainty around such a decision, but the numbers were too compelling for me to ignore.
10. The price of bitcoin will remain volatile.
Some things are just self-evident.
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. His previous articles include Evasive Action, My Bad and Six Lessons. Follow John on Twitter @JohnTLim.The post Ten Tips for 2021 appeared first on HumbleDollar.
December 29, 2020
Hits 2017-20
OVER THE PAST FOUR years, readers have a cast an eye on almost 8.8 million of HumbleDollar's pages. But which have they looked at most often? Below are the 20 most widely read articles since HumbleDollar's launch at year-end 2016:
Terms of the Trade (2019) by Jim Wasserman
Nobody Told Me (2020) by Jonathan Clements
Farewell Money (2019) by Richard Quinn
He Gets, She Gets (2020) by James McGlynn
Don't Delay (2020) by Dennis Friedman
The Taxman Cometh (2020) by James McGlynn
Still Learning (2019) by Richard Quinn
Don't Get an F (2019) by James McGlynn
My Four Goals (2020) by Jonathan Clements
27 Things to Do Now (2020) by Jonathan Clements
Farewell Yield (2020) by Jonathan Clements
Ten Commandments (2018) by Richard Quinn
Enough Already (2017) by Jonathan Clements
Flunking the Test (2020) by Richard Connor
The Tipping Point (2018) by Jonathan Clements
12 Investment Sins (2020) by John Lim
This Too Shall Pass (2020) by Richard Connor
Unanswered (2018) by Jonathan Clements
45 Steps to Success (2019) by Jonathan Clements
The $121,500 Room (2018) by Joel M. Schofer
Among other pages, the three most visited have been—no surprise here—the home page, the main articles page and the main money guide page. Within the money guide, readers have headed most often to the start of the chapters devoted to retirement, the portfolio builder, the financial life planner and investing.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook. Jonathan's most recent articles include What Money Can Buy, Time Limited and Long Time Coming.
Terms of the Trade (2019) by Jim Wasserman
Nobody Told Me (2020) by Jonathan Clements
Farewell Money (2019) by Richard Quinn
He Gets, She Gets (2020) by James McGlynn
Don't Delay (2020) by Dennis Friedman
The Taxman Cometh (2020) by James McGlynn
Still Learning (2019) by Richard Quinn
Don't Get an F (2019) by James McGlynn
My Four Goals (2020) by Jonathan Clements
27 Things to Do Now (2020) by Jonathan Clements
Farewell Yield (2020) by Jonathan Clements
Ten Commandments (2018) by Richard Quinn
Enough Already (2017) by Jonathan Clements
Flunking the Test (2020) by Richard Connor
The Tipping Point (2018) by Jonathan Clements
12 Investment Sins (2020) by John Lim
This Too Shall Pass (2020) by Richard Connor
Unanswered (2018) by Jonathan Clements
45 Steps to Success (2019) by Jonathan Clements
The $121,500 Room (2018) by Joel M. Schofer
Among other pages, the three most visited have been—no surprise here—the home page, the main articles page and the main money guide page. Within the money guide, readers have headed most often to the start of the chapters devoted to retirement, the portfolio builder, the financial life planner and investing.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook. Jonathan's most recent articles include What Money Can Buy, Time Limited and Long Time Coming.The post Hits 2017-20 appeared first on HumbleDollar.
December 28, 2020
Ten Years Retired
I STARTED WORK in 1961 as a mailroom boy earning $1.49 an hour. There was a fellow named Tony who worked there, too. He started a few years before me. Today, Tony is 87 years old and he still works in the same mailroom. He collects his pay, his pension and his Social Security. I don’t know what motivates Tony, but apparently retirement holds no attraction. Tony is atypical.
When my work situation changed after 49 years in a way that took the fun out of the job, I knew it was time to retire. That was 2010.
Today, I participate in several Facebook groups. The groups include more than 2,500 retirees and those concerned with retirement planning issues. I know from these discussions that I’m fortunate and that many retirees face significant problems, often compounded by their own lack of knowledge and planning. Here are eight key things I’ve learned in the decade since I retired:
1. Money helps buy peace of mind. I have a steady retirement income stream, but I’m frequently reminded that most people don’t. They’re always grappling with the questions, “Do I have enough saved? What can I spend?”
2. Time is a blessing and a challenge. Before retiring, I never thought about what I’d do with my time—despite counseling others to do so. What I’ve learned is that, while retirement offers more flexibility, there’s rarely nothing to do. I started a blog in 2009, not knowing you can make money at it. That’s a good thing, because I don’t. Between reading, writing, drawing, travel, golf and, oh yes, grocery shopping, time is fleeting.
3. Inflation is a worry. The fact that my pension, which is the bulk of my income, will never increase is a matter of concern. Cumulative inflation since 2010 has been about 19%. Having a plan to deal with that is essential. The more you rely on retirement income that doesn’t adjust for inflation—which Social Security does—the more essential an inflation strategy is. My plan: As inflation bites, I plan to stop reinvesting my stock dividends and municipal-bond interest, and instead use that money to supplement my pension.
4. Grandkids grow up. When I retired, we had five grandchildren, the oldest age five. When the first was born, in our enthusiasm, we decided to start funding a 529 plan each month. Now we’re doing so for 11 grandkids. When I first retired, we spent a lot of time with the kids. As time goes by, their interest in school, sports, friends and summer activities grows. But that’s a good thing. Now, my goal is to see at least the oldest graduate college.
5. Promises get broken. After 10 years, my employer-provided retiree health and dental benefits are being terminated. Instead, my former employer is giving Medicare-eligible retirees a lump sum each year toward the cost of Medigap coverage, a Part D prescription drug plan and dental insurance.
On the surface, it’s a good deal. There’s lower or no out-of-pocket costs, plus money left in the health reimbursement account (HRA) rolls over from one year to the next. The kicker is reduced drug benefits. On top of that, the HRA employer contribution will increase at only 1.5% a year, thereby violating the “promise” that a retiree’s contribution would equal a fixed percentage of premiums based on his or her years of service and salary at retirement. That’s how my old employer reduced its accounting liability by $500 million. But it could be worse and, indeed, it has been for many retirees.
6. Not working can be hard work. My wife and I lived a 1950s lifestyle. When our first child was born in 1970, she stopped working and became a fulltime mother. Thereafter, we lived on one income. That meant our discretionary spending was limited. No, the kids never did go to Disney.
It also meant that my wife mostly raised our four children—who are only five years apart—and did all the cleaning, shopping, cooking and volunteering, while I worked 12 to 14 hours a day. Even though the kids were out of the house when I retired, I quickly saw the work involved. Now, I do the shopping and cooking, as well as a few other minor duties. But cleaning the condo is a bit too much for us, so I’m thankful we can afford a cleaning service.
7. Financial emergencies still happen. I’ve harped on this several times. The odds of a financial emergency are no smaller in retirement than while working. Even in retirement, my wife and I still live below our means, so we can add regularly to our emergency fund. Why? Ponder this: If you’re living off a nest egg and take a lump sum to cover a financial emergency, you could put your future income at risk.
8. There’s always something to think about. Should I have retired when I did? Am I enjoying my retirement? Am I prepared for the future?
These days, I’m mostly focused on the future, perhaps motivated by the pandemic. Have I planned correctly? Have I thought of everything? Will the kids know where to find what they need? Who wants the Lenox and Waterford? Answer: nobody.
Seriously, will my wife be okay financially? I’m confident right now. But who knows? I may mess things up and make it to 99.
When my work situation changed after 49 years in a way that took the fun out of the job, I knew it was time to retire. That was 2010.
Today, I participate in several Facebook groups. The groups include more than 2,500 retirees and those concerned with retirement planning issues. I know from these discussions that I’m fortunate and that many retirees face significant problems, often compounded by their own lack of knowledge and planning. Here are eight key things I’ve learned in the decade since I retired:
1. Money helps buy peace of mind. I have a steady retirement income stream, but I’m frequently reminded that most people don’t. They’re always grappling with the questions, “Do I have enough saved? What can I spend?”
2. Time is a blessing and a challenge. Before retiring, I never thought about what I’d do with my time—despite counseling others to do so. What I’ve learned is that, while retirement offers more flexibility, there’s rarely nothing to do. I started a blog in 2009, not knowing you can make money at it. That’s a good thing, because I don’t. Between reading, writing, drawing, travel, golf and, oh yes, grocery shopping, time is fleeting.
3. Inflation is a worry. The fact that my pension, which is the bulk of my income, will never increase is a matter of concern. Cumulative inflation since 2010 has been about 19%. Having a plan to deal with that is essential. The more you rely on retirement income that doesn’t adjust for inflation—which Social Security does—the more essential an inflation strategy is. My plan: As inflation bites, I plan to stop reinvesting my stock dividends and municipal-bond interest, and instead use that money to supplement my pension.
4. Grandkids grow up. When I retired, we had five grandchildren, the oldest age five. When the first was born, in our enthusiasm, we decided to start funding a 529 plan each month. Now we’re doing so for 11 grandkids. When I first retired, we spent a lot of time with the kids. As time goes by, their interest in school, sports, friends and summer activities grows. But that’s a good thing. Now, my goal is to see at least the oldest graduate college.
5. Promises get broken. After 10 years, my employer-provided retiree health and dental benefits are being terminated. Instead, my former employer is giving Medicare-eligible retirees a lump sum each year toward the cost of Medigap coverage, a Part D prescription drug plan and dental insurance.
On the surface, it’s a good deal. There’s lower or no out-of-pocket costs, plus money left in the health reimbursement account (HRA) rolls over from one year to the next. The kicker is reduced drug benefits. On top of that, the HRA employer contribution will increase at only 1.5% a year, thereby violating the “promise” that a retiree’s contribution would equal a fixed percentage of premiums based on his or her years of service and salary at retirement. That’s how my old employer reduced its accounting liability by $500 million. But it could be worse and, indeed, it has been for many retirees.
6. Not working can be hard work. My wife and I lived a 1950s lifestyle. When our first child was born in 1970, she stopped working and became a fulltime mother. Thereafter, we lived on one income. That meant our discretionary spending was limited. No, the kids never did go to Disney.
It also meant that my wife mostly raised our four children—who are only five years apart—and did all the cleaning, shopping, cooking and volunteering, while I worked 12 to 14 hours a day. Even though the kids were out of the house when I retired, I quickly saw the work involved. Now, I do the shopping and cooking, as well as a few other minor duties. But cleaning the condo is a bit too much for us, so I’m thankful we can afford a cleaning service.
7. Financial emergencies still happen. I’ve harped on this several times. The odds of a financial emergency are no smaller in retirement than while working. Even in retirement, my wife and I still live below our means, so we can add regularly to our emergency fund. Why? Ponder this: If you’re living off a nest egg and take a lump sum to cover a financial emergency, you could put your future income at risk.
8. There’s always something to think about. Should I have retired when I did? Am I enjoying my retirement? Am I prepared for the future?
These days, I’m mostly focused on the future, perhaps motivated by the pandemic. Have I planned correctly? Have I thought of everything? Will the kids know where to find what they need? Who wants the Lenox and Waterford? Answer: nobody.
Seriously, will my wife be okay financially? I’m confident right now. But who knows? I may mess things up and make it to 99.
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Boredwalk, Last Stop and The Late Show. Follow Dick on Twitter @QuinnsComments.
The post Ten Years Retired appeared first on HumbleDollar.
December 27, 2020
What We’ve Learned
WHEN I THINK BACK on 2020—and I know we aren’t quite done with it yet—I’m reminded of the movie Alexander and the Terrible, Horrible, No Good, Very Bad Day. But to paraphrase Nietzsche, chaos isn't all bad—if something positive ultimately emerges from it.
Below are five financial lessons that, in my mind, are worth carrying beyond this year:
1. Stock prices respond to news—but never in a predictable way. Leading up to the election, anxiety levels were running high. But in the end, even though there was a lot of noise in the political arena, the market reacted with equanimity. In fact, since election day, the S&P 500 is up about 10%. The lesson: In the ordinary course of events—even in a year with above-average political heat—stock prices care less about Washington and more about the economic fortunes of the underlying companies.
Consider this: Over the past 20 years, there have been six presidential elections. How has the market reacted to them? In the month following the election, the market has risen half the time and fallen the other half. On average, across those six elections, the reaction has been essentially a nonreaction: up 0.08%. You could have flipped a coin and gotten the same result.
Just before the 2020 election, one observer suggested this thought experiment: Suppose you’re considering buying a new phone or a new car. Will it make any difference to that decision whether a Democrat or Republican is sitting in the Oval Office? I think that sums it up well. As much power as presidents have, and as much emotion as they elicit, ultimately it’s corporate profits that drive share prices.
2. Market bubbles are tricky for lots of reasons—but mostly because no two look the same. We’re all familiar with the Dutch tulip bubble of the 1600s, the stock market mania of the Roaring 20s and the dot-com bubble of the 1990s. With the benefit of hindsight, we recognize these episodes as collective madness. But the problem for investors is that no two bubbles look exactly the same. We’d like to think we can spot a wolf in sheep’s clothing, but wolves are very good at disguise.
If someone tried today to sell you an overpriced tulip bulb or shares in an unprofitable company like Webvan, you’d spot it a mile away. But when the price of an electric car company rises 690% inside of a year, we’re less likely to see it for what it is. That’s because it’s so easy to paint a picture about the future: Elon Musk is a genius, the narrative goes. It’s more than a car company, they’re making trucks, too, and batteries and drivetrains and who knows what else. From that perspective, you’d be crazy not to invest in Tesla.
It’s the same with bitcoin: If you really believe that it will replace traditional currencies, it doesn’t matter that the price has tripled this year. I don’t know when or how these bubbles will burst, but history suggests they will. The lesson: If it looks like a bubble—if the price chart looks dangerously close to vertical—then, more often than not, it probably is. If you’re interested in this topic, I recommend Charles Kindleberger’s classic Manias, Panics, and Crashes: A History of Financial Crises.
3. The S&P 500 is a reasonable proxy for the market—but it isn’t perfect. When most people talk about the market, they’re usually referring to the Dow Jones Industrial Average or the S&P 500. Most of the time, that’s reasonable. The correlation between the Dow or the S&P and the overall market is close to 1.0. In other words, they move in almost perfect unison.
But they aren’t exactly the same. The Dow has just 30 stocks. While the S&P 500 is more diversified, it still—of course—includes just 500 companies. Meanwhile, the U.S. stock market consists of thousands of publicly traded companies. As research has shown, and as we’ve seen this year, just a small number of stocks account for a large part of the market’s gains over time, so you don’t want to miss one. The lesson: If you’re building a portfolio, be sure to cast a net that’s wider than these two well-known market benchmarks.
4. Wall Street people know a lot—but never enough to be useful. The financial business is full of analysts and fund managers whose job it is to generate opinions. While they’re incredibly well-informed, the events of this year highlight the reality that no one can truly know everything. This is true at a macro level, as we saw when a virus came out of nowhere and wreaked havoc on the economy.
It’s also true on a micro level, as we witnessed recently when an obscure technology company called SolarWinds (symbol: SWI) turned out to be the weak link in enabling a massive hack against U.S. government systems. Prior to the news, any analyst looking at SWI would have seen a strong, growing business. Revenue had more than doubled over the past five years and the stock had been flying, up 27% this year. But no one—other than the hackers—knew about this risk below the surface. As a result of this unpleasant surprise, when the hack was revealed, the stock fell 40% almost overnight.
I often feel like a broken record when I say no one has a crystal ball. But it bears repeating. Whether it’s a virus or a hack or any other unexpected event, the only thing you can count on is that unexpected things will continue to happen. The lesson: If you want to listen to forecasters, that’s fine. But recognize that it’s just info-tainment and doesn't contain the information you'd really want to know.
5. Once-in-a-blue-moon events should be rare—but occur pretty frequently. In his book When Genius Failed, Roger Lowenstein chronicles the blow-up of the hedge fund Long-Term Capital Management. How did a group of geniuses, including two Nobel Prize winners, fail so spectacularly? Long-Term Capital had built its trading strategy on a set of carefully researched statistical assumptions. But, Lowenstein writes, “They had forgotten the human factor.” They ignored the reality that market behavior doesn’t fit neatly into standard statistical models.
Extreme price movements occur much more frequently than a normal distribution would predict. The lesson: When constructing a portfolio, you should build in plenty of margin for error. Spreadsheets can only take you so far. But since they can’t predict viruses or hacks or anything else, it’s okay to be—and indeed you probably want to be—more conservative than the numbers suggest.
Adam M. Grossman’s previous articles include Unhelpful Advice, Help Today's Self and Split the Difference. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.
Below are five financial lessons that, in my mind, are worth carrying beyond this year:
1. Stock prices respond to news—but never in a predictable way. Leading up to the election, anxiety levels were running high. But in the end, even though there was a lot of noise in the political arena, the market reacted with equanimity. In fact, since election day, the S&P 500 is up about 10%. The lesson: In the ordinary course of events—even in a year with above-average political heat—stock prices care less about Washington and more about the economic fortunes of the underlying companies.
Consider this: Over the past 20 years, there have been six presidential elections. How has the market reacted to them? In the month following the election, the market has risen half the time and fallen the other half. On average, across those six elections, the reaction has been essentially a nonreaction: up 0.08%. You could have flipped a coin and gotten the same result.
Just before the 2020 election, one observer suggested this thought experiment: Suppose you’re considering buying a new phone or a new car. Will it make any difference to that decision whether a Democrat or Republican is sitting in the Oval Office? I think that sums it up well. As much power as presidents have, and as much emotion as they elicit, ultimately it’s corporate profits that drive share prices.
2. Market bubbles are tricky for lots of reasons—but mostly because no two look the same. We’re all familiar with the Dutch tulip bubble of the 1600s, the stock market mania of the Roaring 20s and the dot-com bubble of the 1990s. With the benefit of hindsight, we recognize these episodes as collective madness. But the problem for investors is that no two bubbles look exactly the same. We’d like to think we can spot a wolf in sheep’s clothing, but wolves are very good at disguise.
If someone tried today to sell you an overpriced tulip bulb or shares in an unprofitable company like Webvan, you’d spot it a mile away. But when the price of an electric car company rises 690% inside of a year, we’re less likely to see it for what it is. That’s because it’s so easy to paint a picture about the future: Elon Musk is a genius, the narrative goes. It’s more than a car company, they’re making trucks, too, and batteries and drivetrains and who knows what else. From that perspective, you’d be crazy not to invest in Tesla.
It’s the same with bitcoin: If you really believe that it will replace traditional currencies, it doesn’t matter that the price has tripled this year. I don’t know when or how these bubbles will burst, but history suggests they will. The lesson: If it looks like a bubble—if the price chart looks dangerously close to vertical—then, more often than not, it probably is. If you’re interested in this topic, I recommend Charles Kindleberger’s classic Manias, Panics, and Crashes: A History of Financial Crises.
3. The S&P 500 is a reasonable proxy for the market—but it isn’t perfect. When most people talk about the market, they’re usually referring to the Dow Jones Industrial Average or the S&P 500. Most of the time, that’s reasonable. The correlation between the Dow or the S&P and the overall market is close to 1.0. In other words, they move in almost perfect unison.
But they aren’t exactly the same. The Dow has just 30 stocks. While the S&P 500 is more diversified, it still—of course—includes just 500 companies. Meanwhile, the U.S. stock market consists of thousands of publicly traded companies. As research has shown, and as we’ve seen this year, just a small number of stocks account for a large part of the market’s gains over time, so you don’t want to miss one. The lesson: If you’re building a portfolio, be sure to cast a net that’s wider than these two well-known market benchmarks.
4. Wall Street people know a lot—but never enough to be useful. The financial business is full of analysts and fund managers whose job it is to generate opinions. While they’re incredibly well-informed, the events of this year highlight the reality that no one can truly know everything. This is true at a macro level, as we saw when a virus came out of nowhere and wreaked havoc on the economy.
It’s also true on a micro level, as we witnessed recently when an obscure technology company called SolarWinds (symbol: SWI) turned out to be the weak link in enabling a massive hack against U.S. government systems. Prior to the news, any analyst looking at SWI would have seen a strong, growing business. Revenue had more than doubled over the past five years and the stock had been flying, up 27% this year. But no one—other than the hackers—knew about this risk below the surface. As a result of this unpleasant surprise, when the hack was revealed, the stock fell 40% almost overnight.
I often feel like a broken record when I say no one has a crystal ball. But it bears repeating. Whether it’s a virus or a hack or any other unexpected event, the only thing you can count on is that unexpected things will continue to happen. The lesson: If you want to listen to forecasters, that’s fine. But recognize that it’s just info-tainment and doesn't contain the information you'd really want to know.
5. Once-in-a-blue-moon events should be rare—but occur pretty frequently. In his book When Genius Failed, Roger Lowenstein chronicles the blow-up of the hedge fund Long-Term Capital Management. How did a group of geniuses, including two Nobel Prize winners, fail so spectacularly? Long-Term Capital had built its trading strategy on a set of carefully researched statistical assumptions. But, Lowenstein writes, “They had forgotten the human factor.” They ignored the reality that market behavior doesn’t fit neatly into standard statistical models.
Extreme price movements occur much more frequently than a normal distribution would predict. The lesson: When constructing a portfolio, you should build in plenty of margin for error. Spreadsheets can only take you so far. But since they can’t predict viruses or hacks or anything else, it’s okay to be—and indeed you probably want to be—more conservative than the numbers suggest.
Adam M. Grossman’s previous articles include Unhelpful Advice, Help Today's Self and Split the Difference. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.The post What We’ve Learned appeared first on HumbleDollar.
December 26, 2020
Too Thrifty?
I NEVER REALLY liked the vehicles that I owned. They were an unimpressive lot, including a Volkswagen Beetle, Mercury Capri, Toyota SR5 pickup, Toyota Camry and Ford Fusion. I would like to say they got me where I needed to go, but that wasn’t always the case. All the cars, except for the Camry, were unreliable, which would sometimes make my life stressful and difficult. Of course, keeping those cars for many years didn’t help.
When I think about it, I didn’t really like the homes I lived in, either. They included small apartments, without many of the standard conveniences you’d expect when renting or buying a home.
Some of my apartments were downright terrible. In 1979, I rented a studio apartment located on an alley above a garage. The apartment had poor insulation. It would get so cold in the winter, it felt like the North Pole, and it would get so hot in the summer, it felt like Death Valley. It was so small a friend who visited asked if the place had a bathroom.
It wasn’t the safest place to live. A drug dealer lived in the apartment next to me, my car was broken into more than once and one day someone stole my clothes from the laundry room. I stayed there for six years, putting up with all the discomfort and trouble that surrounded me.
The small 789-square-foot condominium I purchased in 1985 was an upgrade, but it wasn’t a place you’d want to stay for 35 years, which is what I did. A young lady, about the same age I was when I first moved into that studio apartment above the garage, bought my condo earlier this year. Her real estate agent informed me that this was just a starter home for her and she’d probably be moving within five years. When I moved to my current home, I realized all the comforts I missed out on during those years living in that small condo.
I made good money working for a large aerospace company, so I didn’t have to live that way. But I chose to—because I wanted to save money. When I look at my investment portfolio today, I have more money than I need for a comfortable and secure retirement. In fact, I probably saved too much.
You might ask, “Can someone save too much money? Is there such a phenomenon in personal finance?” I think so.
When it comes to saving for retirement, you have to strike a balance between forgoing smaller rewards today for larger rewards later. But you don’t want to delay gratification to such a degree that you make life harder than it should be. And that’s what I did to accumulate the large pile of cash that I’ll probably never need. Some of this money would have been better spent in my earlier years.
After I retired, I hired a low-cost financial advisor to manage my investments. Hiring that financial advisor got me thinking about my relationship with money.
One day, we were going over my budget for the year. I could tell he was prodding me to spend more. He asked me if I wanted to buy a new car.
“I don’t believe so,” I said.
He jokingly responded, “How about a boat?”
“No, I don’t fish.” I interrupted him. “I should tell you I’m getting married.”
“Congratulations, you surely could afford to buy her a nice ring,” my advisor said. “Why don’t we add that to your budget for this year?”
Since then, I have been adding quite a few more items to my yearly budget.
The upshot: I’m trying to live more in the moment, to enjoy life more. You shouldn’t live life always thinking about your future self—because it doesn’t do you any good saving money if you aren’t willing to spend it.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"Some days, I question whether I was simply born without the self-control needed for delayed gratification," writes Mariah Davis. "But as I continue to work at this, I also find I’m becoming more disciplined."
What can money buy? Sure, it can buy you more stuff. But there are 12 other things that money can also buy—all of them arguably far more valuable.
"What caught my attention was the wad of bills shoved in the back of the safe-deposit box," recalls Dennis Friedman. "I asked my mother how much was there. She said she didn’t know. I counted almost $18,000."
Isaac Cathey's Honda Civic has lost almost 88% of its value. But it may have made him $98,000.
Are markets always rational? Adam Grossman doesn't think so. "The reality is that markets are often driven by stories, momentum, greed, fear, euphoria—and, among those late to the party, a fear of missing out."
Did you claim Social Security, only to discover you don’t need the extra income right now? As Rick Connor explains, you have two options.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. His previous articles include Live It Up, Don't Delay and Try Not to Slip. Follow Dennis on Twitter @DMFrie.
When I think about it, I didn’t really like the homes I lived in, either. They included small apartments, without many of the standard conveniences you’d expect when renting or buying a home.
Some of my apartments were downright terrible. In 1979, I rented a studio apartment located on an alley above a garage. The apartment had poor insulation. It would get so cold in the winter, it felt like the North Pole, and it would get so hot in the summer, it felt like Death Valley. It was so small a friend who visited asked if the place had a bathroom.
It wasn’t the safest place to live. A drug dealer lived in the apartment next to me, my car was broken into more than once and one day someone stole my clothes from the laundry room. I stayed there for six years, putting up with all the discomfort and trouble that surrounded me.
The small 789-square-foot condominium I purchased in 1985 was an upgrade, but it wasn’t a place you’d want to stay for 35 years, which is what I did. A young lady, about the same age I was when I first moved into that studio apartment above the garage, bought my condo earlier this year. Her real estate agent informed me that this was just a starter home for her and she’d probably be moving within five years. When I moved to my current home, I realized all the comforts I missed out on during those years living in that small condo.
I made good money working for a large aerospace company, so I didn’t have to live that way. But I chose to—because I wanted to save money. When I look at my investment portfolio today, I have more money than I need for a comfortable and secure retirement. In fact, I probably saved too much.
You might ask, “Can someone save too much money? Is there such a phenomenon in personal finance?” I think so.
When it comes to saving for retirement, you have to strike a balance between forgoing smaller rewards today for larger rewards later. But you don’t want to delay gratification to such a degree that you make life harder than it should be. And that’s what I did to accumulate the large pile of cash that I’ll probably never need. Some of this money would have been better spent in my earlier years.
After I retired, I hired a low-cost financial advisor to manage my investments. Hiring that financial advisor got me thinking about my relationship with money.
One day, we were going over my budget for the year. I could tell he was prodding me to spend more. He asked me if I wanted to buy a new car.
“I don’t believe so,” I said.
He jokingly responded, “How about a boat?”
“No, I don’t fish.” I interrupted him. “I should tell you I’m getting married.”
“Congratulations, you surely could afford to buy her a nice ring,” my advisor said. “Why don’t we add that to your budget for this year?”
Since then, I have been adding quite a few more items to my yearly budget.
The upshot: I’m trying to live more in the moment, to enjoy life more. You shouldn’t live life always thinking about your future self—because it doesn’t do you any good saving money if you aren’t willing to spend it.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"Some days, I question whether I was simply born without the self-control needed for delayed gratification," writes Mariah Davis. "But as I continue to work at this, I also find I’m becoming more disciplined."
What can money buy? Sure, it can buy you more stuff. But there are 12 other things that money can also buy—all of them arguably far more valuable.
"What caught my attention was the wad of bills shoved in the back of the safe-deposit box," recalls Dennis Friedman. "I asked my mother how much was there. She said she didn’t know. I counted almost $18,000."
Isaac Cathey's Honda Civic has lost almost 88% of its value. But it may have made him $98,000.
Are markets always rational? Adam Grossman doesn't think so. "The reality is that markets are often driven by stories, momentum, greed, fear, euphoria—and, among those late to the party, a fear of missing out."
Did you claim Social Security, only to discover you don’t need the extra income right now? As Rick Connor explains, you have two options.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. His previous articles include Live It Up, Don't Delay and Try Not to Slip. Follow Dennis on Twitter @DMFrie.The post Too Thrifty? appeared first on HumbleDollar.
December 25, 2020
What Money Can Buy
YES, MONEY BUYS STUFF—and we all need some stuff. But that’s probably its most prosaic use. Want to make the most of the dollars that pass through your hands? Here are a dozen other things that money can buy:
The warm glow that comes from helping those who are less financially fortunate.
The extra time you purchase by hiring someone to do chores you dislike.
The fun of daydreaming about all the experiences and possessions you might buy.
A sense of immortality when you start a child on a lifetime of investing.
The sheepish pleasure of purchasing a surprise gift for someone you love.
The wonder of looking back and seeing how much your money has grown.
The fond memories that come with buying one small memento on vacation and bringing it home.
The feeling of security you get when you look at the wealth you’ve amassed.
The fun of throwing a really good party.
The sense of generosity you feel when you leave an unusually large tip for those who went out of their way to help you.
The chance to ponder the possibilities—all the ways you might shake up your life and do something entirely different.
Those days when you do solely what you want, rather than what’s necessary to make money.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook. Jonathan's most recent articles include Time Limited, Long Time Coming and Next Year Foretold.
The warm glow that comes from helping those who are less financially fortunate.
The extra time you purchase by hiring someone to do chores you dislike.
The fun of daydreaming about all the experiences and possessions you might buy.
A sense of immortality when you start a child on a lifetime of investing.
The sheepish pleasure of purchasing a surprise gift for someone you love.
The wonder of looking back and seeing how much your money has grown.
The fond memories that come with buying one small memento on vacation and bringing it home.
The feeling of security you get when you look at the wealth you’ve amassed.
The fun of throwing a really good party.
The sense of generosity you feel when you leave an unusually large tip for those who went out of their way to help you.
The chance to ponder the possibilities—all the ways you might shake up your life and do something entirely different.
Those days when you do solely what you want, rather than what’s necessary to make money.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook. Jonathan's most recent articles include Time Limited, Long Time Coming and Next Year Foretold.The post What Money Can Buy appeared first on HumbleDollar.
December 24, 2020
Flunking the Test
I RECENTLY WROTE about how, if you claim Social Security benefits before age 66 or 67, your monthly check could be reduced if your earned income is “too high.” Shortly after the article appeared, I ran into a colleague who was struggling with the issue.
My colleague had retired a few years back. He thought there might be some opportunities to do part-time consulting with our old employer. But nothing came of it during the first year he was retired, so he claimed Social Security in 2020. Sure enough, several consulting opportunities almost immediately popped up. He quickly earned more than the minimum allowable amount under Social Security’s “earnings test” and there’s a good chance he’ll exceed his maximum allowable earnings for 2020. Result: He’ll lose much and perhaps all of his Social Security benefits for this year.
In 2020, the Social Security Administration (SSA) allows you to earn $18,240 before your benefit is reduced. If you earn more than $18,240, you lose $1 in benefits for every $2 you earn above $18,240. Once you reach your full retirement age (FRA), which is age 66 or 67 depending on the year you were born, you can earn any amount without a reduction in benefits.
My colleague’s question: Is there anything Social Security recipients can do if they claimed Social Security, only to discover they don't need the extra income right now? It turns out the SSA provides two options, both tied to your age.
The first option is available if you haven’t yet reached your FRA and you’re in the first year of receiving benefits. If you meet both criteria, you can apply to Social Security for a “withdrawal of benefits.” Timing is key. Social Security will let you withdraw your original application for retirement benefits only once and it must be done within 12 months of the date you first claimed benefits. You fill out Social Security Form SSA-521 and send it to your local Social Security office.
If you request a withdrawal of benefits, Social Security will treat it as if you never applied for benefits in the first place. The catch: You must repay every dollar you’ve received. That includes your monthly retirement benefit, any family benefits and any money withheld from your payments, such as for Medicare premiums. If you’ve been receiving retirement benefits for more than a year, the window to apply for a withdrawal is closed.
While you’re requesting a withdrawal of benefits, you might also withdraw from Medicare, assuming you’re age 65 or older and you find yourself with a job offering health benefits. This would save you from paying Medicare premiums. But there are serious issues to consider, including the possibility that you’ll get hit with permanently higher premiums when you re-enroll. Contemplating withdrawing from Medicare? Please get expert advice.
That bring us to option No. 2, which is available once you reach your full retirement age. At that point, the Social Security earnings test no longer applies. Still, because you're working or because you've had second thoughts about claiming benefits early, you might want to stop benefits.
To that end, after you reach your full retirement age of 66 or 67, you can request a “suspension of benefits.” During a suspension, you accrue delayed retirement credits, which means an increase in your monthly retirement benefit when you start collecting again. You can ask the SSA to reinstate your benefits at any time until you turn 70. If you don’t restart benefits by age 70, the agency will do it for you.
If you suspend benefits, any family members who receive benefits based on your earnings record will also be suspended, except for divorced spouses. Any benefits you receive on someone else’s record will also be suspended. Additionally, your Medicare Part B premiums cannot be deducted from your suspended benefits. Instead, the Centers for Medicare & Medicaid Services will bill you for those Part B premiums.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Lucky Strikes, Rate Debate and For Goodness Sake. Follow Rick on Twitter @RConnor609.
My colleague had retired a few years back. He thought there might be some opportunities to do part-time consulting with our old employer. But nothing came of it during the first year he was retired, so he claimed Social Security in 2020. Sure enough, several consulting opportunities almost immediately popped up. He quickly earned more than the minimum allowable amount under Social Security’s “earnings test” and there’s a good chance he’ll exceed his maximum allowable earnings for 2020. Result: He’ll lose much and perhaps all of his Social Security benefits for this year.
In 2020, the Social Security Administration (SSA) allows you to earn $18,240 before your benefit is reduced. If you earn more than $18,240, you lose $1 in benefits for every $2 you earn above $18,240. Once you reach your full retirement age (FRA), which is age 66 or 67 depending on the year you were born, you can earn any amount without a reduction in benefits.
My colleague’s question: Is there anything Social Security recipients can do if they claimed Social Security, only to discover they don't need the extra income right now? It turns out the SSA provides two options, both tied to your age.
The first option is available if you haven’t yet reached your FRA and you’re in the first year of receiving benefits. If you meet both criteria, you can apply to Social Security for a “withdrawal of benefits.” Timing is key. Social Security will let you withdraw your original application for retirement benefits only once and it must be done within 12 months of the date you first claimed benefits. You fill out Social Security Form SSA-521 and send it to your local Social Security office.
If you request a withdrawal of benefits, Social Security will treat it as if you never applied for benefits in the first place. The catch: You must repay every dollar you’ve received. That includes your monthly retirement benefit, any family benefits and any money withheld from your payments, such as for Medicare premiums. If you’ve been receiving retirement benefits for more than a year, the window to apply for a withdrawal is closed.
While you’re requesting a withdrawal of benefits, you might also withdraw from Medicare, assuming you’re age 65 or older and you find yourself with a job offering health benefits. This would save you from paying Medicare premiums. But there are serious issues to consider, including the possibility that you’ll get hit with permanently higher premiums when you re-enroll. Contemplating withdrawing from Medicare? Please get expert advice.
That bring us to option No. 2, which is available once you reach your full retirement age. At that point, the Social Security earnings test no longer applies. Still, because you're working or because you've had second thoughts about claiming benefits early, you might want to stop benefits.
To that end, after you reach your full retirement age of 66 or 67, you can request a “suspension of benefits.” During a suspension, you accrue delayed retirement credits, which means an increase in your monthly retirement benefit when you start collecting again. You can ask the SSA to reinstate your benefits at any time until you turn 70. If you don’t restart benefits by age 70, the agency will do it for you.
If you suspend benefits, any family members who receive benefits based on your earnings record will also be suspended, except for divorced spouses. Any benefits you receive on someone else’s record will also be suspended. Additionally, your Medicare Part B premiums cannot be deducted from your suspended benefits. Instead, the Centers for Medicare & Medicaid Services will bill you for those Part B premiums.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Lucky Strikes, Rate Debate and For Goodness Sake. Follow Rick on Twitter @RConnor609.The post Flunking the Test appeared first on HumbleDollar.
