Jonathan Clements's Blog, page 306
November 23, 2020
Evasive Action
DEAR FAMILY, you know I don’t typically give unsolicited investment advice. But today, I’m breaking that rule, because I don’t want you to get hurt financially.
I can’t promise that, by following my advice, you’ll be better off in the short run. But I firmly believe that you’ll be better off in the long run, by which I mean in the next five to 10 years. Please take this letter for what it is, simply a warning and food for thought. Ultimately, you must make your own decision.
1. If you’re fortunate enough to have large gains in growth stocks such as Amazon, Apple, Facebook, Microsoft, Netflix, Tesla and Zoom, I urge you to take some profits. At a minimum, I recommend selling an amount equal to your cost basis—what you paid for these stocks. If you have great conviction in these companies, hold whatever remains after selling your cost basis. That way, you cannot lose. If these stocks drop dramatically—I’m not necessarily predicting that—you’ll still have a profit because you’ve sold your cost basis. These stocks are selling at extremely lofty valuations. History is clear: Trees do not grow to the sky, and nor do growth stocks.
2. If you’re overweight U.S. stocks and underweight international stocks, rebalance into international. The U.S. market has trounced international stocks since 2009, with the S&P 500 up 261%, versus 37% for developed international markets and 86% for emerging markets (excluding dividends).
How much should you have in international stocks? I advocate allocating at least 30% of a stock portfolio to international. But if you’re like most people, you’ve given up on international stocks and are overweight U.S. shares. This is exactly the wrong time to take such a position. Valuations matter. There’s simply no question that the U.S. is among the world’s most highly priced markets.
What’s the cheapest? Emerging market stocks. While I don’t recommend that you follow my footsteps, I have almost no U.S. stocks. Almost my entire stock allocation is international. This is extreme and I don’t recommend you do this, but I mention it so you know how much conviction I have.
3. Again, if you’re like most people, there’s a good chance you’ve given up on value stocks. For what seems like an eternity, growth stocks have triumphed and value stocks have underperformed. The valuation disparity between the two has never been so great, perhaps with the exception of the market peak in 2000. If you’re overweight growth, do yourself a favor and rebalance into value. You might take some of the proceeds from your sales of growth stocks and put them into value stocks and, better yet, international value. One of my favorites is Dodge & Cox International Stock Fund (ticker: DODFX).
4. My final piece of advice: Have a small amount of gold exposure. This could be accomplished by buying an exchange-traded fund (ETF) such as SPDR Gold Shares (GLD) or iShares Gold Trust (IAU). When I say “small,” I’m talking about 5% or less of your total portfolio. I personally have about 5% in SPDR Gold and 2% in VanEck Vectors Gold Miners (GDX). The latter is an ETF invested in a diversified basket of goldmining companies.
This is perhaps my most controversial suggestion, so let me explain. Over the past decade, and especially this year, there’s been extreme money printing by the Federal Reserve in the form of QE, or quantitative easing. Take a look at this chart, which represents how much money the Fed has printed. Next, check out this graph of U.S. money supply, particularly the far right end of the curve. On top of this, the Fed recently made a substantial change in policy. It’s now targeting average inflation of at least 2%, which means we may see higher inflation in the future to compensate for the recent far lower inflation rate.
The bottom line: Inflation is a greater risk today than ever before in my investing career. While there’s no guarantee that inflation will spiral out of control, think of gold as insurance for your portfolio. Normally, Treasury Inflation Protected Securities, often known simply as TIPS, would also serve as an inflation hedge. But their yields are currently negative, which is not terribly attractive, though they would certainly provide some protection if inflation spiked higher.
My first three points are based on two fundamental tenets of investing. First, valuations matter. Second, regression to the mean is real. Both principles argue for moving from growth to value and from U.S. stocks to international markets. I don’t have a crystal ball, but everything that I know about investing tells me the above advice is sound. Think about it.
Sincerely yours,
John
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 My Bad, Six Lessons and Risk Returns. Follow John on Twitter @JohnTLim.
I can’t promise that, by following my advice, you’ll be better off in the short run. But I firmly believe that you’ll be better off in the long run, by which I mean in the next five to 10 years. Please take this letter for what it is, simply a warning and food for thought. Ultimately, you must make your own decision.
1. If you’re fortunate enough to have large gains in growth stocks such as Amazon, Apple, Facebook, Microsoft, Netflix, Tesla and Zoom, I urge you to take some profits. At a minimum, I recommend selling an amount equal to your cost basis—what you paid for these stocks. If you have great conviction in these companies, hold whatever remains after selling your cost basis. That way, you cannot lose. If these stocks drop dramatically—I’m not necessarily predicting that—you’ll still have a profit because you’ve sold your cost basis. These stocks are selling at extremely lofty valuations. History is clear: Trees do not grow to the sky, and nor do growth stocks.
2. If you’re overweight U.S. stocks and underweight international stocks, rebalance into international. The U.S. market has trounced international stocks since 2009, with the S&P 500 up 261%, versus 37% for developed international markets and 86% for emerging markets (excluding dividends).
How much should you have in international stocks? I advocate allocating at least 30% of a stock portfolio to international. But if you’re like most people, you’ve given up on international stocks and are overweight U.S. shares. This is exactly the wrong time to take such a position. Valuations matter. There’s simply no question that the U.S. is among the world’s most highly priced markets.
What’s the cheapest? Emerging market stocks. While I don’t recommend that you follow my footsteps, I have almost no U.S. stocks. Almost my entire stock allocation is international. This is extreme and I don’t recommend you do this, but I mention it so you know how much conviction I have.
3. Again, if you’re like most people, there’s a good chance you’ve given up on value stocks. For what seems like an eternity, growth stocks have triumphed and value stocks have underperformed. The valuation disparity between the two has never been so great, perhaps with the exception of the market peak in 2000. If you’re overweight growth, do yourself a favor and rebalance into value. You might take some of the proceeds from your sales of growth stocks and put them into value stocks and, better yet, international value. One of my favorites is Dodge & Cox International Stock Fund (ticker: DODFX).
4. My final piece of advice: Have a small amount of gold exposure. This could be accomplished by buying an exchange-traded fund (ETF) such as SPDR Gold Shares (GLD) or iShares Gold Trust (IAU). When I say “small,” I’m talking about 5% or less of your total portfolio. I personally have about 5% in SPDR Gold and 2% in VanEck Vectors Gold Miners (GDX). The latter is an ETF invested in a diversified basket of goldmining companies.
This is perhaps my most controversial suggestion, so let me explain. Over the past decade, and especially this year, there’s been extreme money printing by the Federal Reserve in the form of QE, or quantitative easing. Take a look at this chart, which represents how much money the Fed has printed. Next, check out this graph of U.S. money supply, particularly the far right end of the curve. On top of this, the Fed recently made a substantial change in policy. It’s now targeting average inflation of at least 2%, which means we may see higher inflation in the future to compensate for the recent far lower inflation rate.
The bottom line: Inflation is a greater risk today than ever before in my investing career. While there’s no guarantee that inflation will spiral out of control, think of gold as insurance for your portfolio. Normally, Treasury Inflation Protected Securities, often known simply as TIPS, would also serve as an inflation hedge. But their yields are currently negative, which is not terribly attractive, though they would certainly provide some protection if inflation spiked higher.
My first three points are based on two fundamental tenets of investing. First, valuations matter. Second, regression to the mean is real. Both principles argue for moving from growth to value and from U.S. stocks to international markets. I don’t have a crystal ball, but everything that I know about investing tells me the above advice is sound. Think about it.
Sincerely yours,
John
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 My Bad, Six Lessons and Risk Returns. Follow John on Twitter @JohnTLim.The post Evasive Action appeared first on HumbleDollar.
November 22, 2020
Trends That End
CONGRATULATIONS are in order for Jay and Kateri Schwandt, a Michigan couple who recently welcomed a new baby girl. This might not seem like an event that's worthy of national news, except this is the Schwandt’s 15th child—and the first 14 are all boys. In an interview, Jay Schwandt said he didn’t think a girl was even possible: “You know after 14 boys, we just assumed perhaps medically it just wasn’t meant to be.”
The Schwandt’s new baby illustrates a point that’s often debated in the world of personal finance: When you see a pattern, especially one that’s been repeating for a very long time, is it safe to assume that it will continue indefinitely?
An example: The U.S. stock market has risen by 10% a year, on average, for nearly 100 years. Is it safe to assume this will continue? The simple answer is “yes”—or “yes, probably.” Despite the dysfunction in Washington, we continue to lead in technology and innovation. Ultimately, this helps drive the stock market. That would be the simple answer.
But it would also be easy to make the counterargument: The U.S. population is growing much more slowly today than it did in the past, and population growth is a key ingredient for economic growth. We also have unprecedented levels of federal debt. Some believe those factors will combine to slow future growth.
Personally, I’m in the first camp: I believe the U.S. will continue to grow and innovate, and I believe this will be positive for the stock market. But patterns do reverse—even longstanding patterns. This year has witnessed several such reversals:
Warren Buffett likes to say that his favorite holding period for a stock is “forever.” But in a recent regulatory filing, his firm, Berkshire Hathaway, revealed that it had sold nearly half its stake in Wells Fargo after a series of scandals tarnished the bank’s reputation. Wells Fargo had previously been one of Berkshire’s “Big Four” investments—a company Buffett had praised for decades. For a while, in fact, Berkshire was Wells Fargo’s biggest shareholder. But then things changed at the bank. As a result, despite his long history with the company and his "forever" philosophy, Buffett walked away.
Over the summer, the Federal Reserve upended decades of policy when it overhauled a document some refer to as the Fed’s constitution.
For years, value stocks have underperformed growth stocks. Multiple articles and essays in recent years have carried the headline, “Is Value Dead?” But after years of lagging, value stocks—and especially small value stocks—have suddenly caught fire, easily outperforming their more popular growth stock peers.
Look back further into investment history and there are many similar cases. In the 1960s, the so-called Nifty Fifty stocks were called “one decision” stocks, because it was believed that investors needed to make just one decision—to buy them—and thereafter would never need to sell. But by the early 1970s, sentiment shifted and, as a group, the Nifty Fifty lost more than 80% of their value.
More recently, crude oil prices—and, along with them, the stocks of energy companies—have seen a similar collapse. For a long time, people believed that the world might run out of oil, a theory known as “peak oil.” This led to a dramatic runup in oil prices. Just before the recession hit in 2008, the price for a barrel of crude oil topped $140. But then suddenly the market changed. Today, the concept of “peak oil” has been discarded and a barrel of crude is barely above $40.
Time after time, there have been trends in the investment world that looked like they might continue more or less indefinitely. But then something happens, causing the trend to break down or even reverse.
The difficult thing as an investor: It’s so easy to build an argument to support practically any view of the future. On any given question, reasonable people differ, but no one truly knows how things will turn out. Where does this leave you? How should you proceed in the absence of a crystal ball?
As a starting point, I’d adopt the mindset Amazon founder Jeff Bezos exhibited in a talk a few years ago, when he acknowledged that nothing lasts forever. “I predict one day Amazon will fail,” he said. “Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not 100-plus years.”
Perhaps that explains why Bezos has sold more than $10 billion of Amazon shares this year and has a plan in place to regularly sell further shares. I’m sure he isn’t worried about Amazon’s near-term outlook. But it’s not inconsistent to also acknowledge that things could change. This sort of balanced view is, I think, exactly the right way to look at any investment.
My second recommendation: Take others’ opinions with a grain of salt. Recognize how easy it is to build a story about the future. Also recognize that Wall Street analysts get paid to make predictions and to sound authoritative when delivering them on TV.
I’d be especially wary of extreme predictions. You may recall that, a few weeks back, I talked about investment legend Jeremy Grantham, who is advising investors to get out of the U.S. stock market. In the end, he might be right or he might be wrong, but his prescription strikes me as extreme. I don’t question Grantham’s wisdom or his experience, but I’d be cautious of any recommendation that doesn’t sound balanced.
I’d also be especially wary of recommendations that sound alarmist. We’ve seen this repeatedly around elections. When each of the last three presidents was elected, those who weren’t the biggest fans of the new president were quick to predict a negative outcome for the economy. But instead, the market went up under President Obama, it went up under President Trump, and it’s been going up in the three or so weeks since the most recent election. People who predict doom often garner headlines—but they’re rarely right.
Simple as it sounds, I believe the best route to investment success is to build a logically diversified portfolio and to avoid making too many changes in response to recent performance, economic data, stories, predictions and opinions—especially political opinions. I don’t pretend that this is easy. It can be difficult to build a portfolio that includes investments and asset classes that have been lagging, especially if they've been lagging for a long time. But as we’ve seen this year and throughout history, trends can reverse. Just ask the Schwandts.
Adam M. Grossman’s previous articles include Getting Personal, Sweat the Big Stuff and Emerging Concerns. 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 Schwandt’s new baby illustrates a point that’s often debated in the world of personal finance: When you see a pattern, especially one that’s been repeating for a very long time, is it safe to assume that it will continue indefinitely?
An example: The U.S. stock market has risen by 10% a year, on average, for nearly 100 years. Is it safe to assume this will continue? The simple answer is “yes”—or “yes, probably.” Despite the dysfunction in Washington, we continue to lead in technology and innovation. Ultimately, this helps drive the stock market. That would be the simple answer.
But it would also be easy to make the counterargument: The U.S. population is growing much more slowly today than it did in the past, and population growth is a key ingredient for economic growth. We also have unprecedented levels of federal debt. Some believe those factors will combine to slow future growth.
Personally, I’m in the first camp: I believe the U.S. will continue to grow and innovate, and I believe this will be positive for the stock market. But patterns do reverse—even longstanding patterns. This year has witnessed several such reversals:
Warren Buffett likes to say that his favorite holding period for a stock is “forever.” But in a recent regulatory filing, his firm, Berkshire Hathaway, revealed that it had sold nearly half its stake in Wells Fargo after a series of scandals tarnished the bank’s reputation. Wells Fargo had previously been one of Berkshire’s “Big Four” investments—a company Buffett had praised for decades. For a while, in fact, Berkshire was Wells Fargo’s biggest shareholder. But then things changed at the bank. As a result, despite his long history with the company and his "forever" philosophy, Buffett walked away.
Over the summer, the Federal Reserve upended decades of policy when it overhauled a document some refer to as the Fed’s constitution.
For years, value stocks have underperformed growth stocks. Multiple articles and essays in recent years have carried the headline, “Is Value Dead?” But after years of lagging, value stocks—and especially small value stocks—have suddenly caught fire, easily outperforming their more popular growth stock peers.
Look back further into investment history and there are many similar cases. In the 1960s, the so-called Nifty Fifty stocks were called “one decision” stocks, because it was believed that investors needed to make just one decision—to buy them—and thereafter would never need to sell. But by the early 1970s, sentiment shifted and, as a group, the Nifty Fifty lost more than 80% of their value.
More recently, crude oil prices—and, along with them, the stocks of energy companies—have seen a similar collapse. For a long time, people believed that the world might run out of oil, a theory known as “peak oil.” This led to a dramatic runup in oil prices. Just before the recession hit in 2008, the price for a barrel of crude oil topped $140. But then suddenly the market changed. Today, the concept of “peak oil” has been discarded and a barrel of crude is barely above $40.
Time after time, there have been trends in the investment world that looked like they might continue more or less indefinitely. But then something happens, causing the trend to break down or even reverse.
The difficult thing as an investor: It’s so easy to build an argument to support practically any view of the future. On any given question, reasonable people differ, but no one truly knows how things will turn out. Where does this leave you? How should you proceed in the absence of a crystal ball?
As a starting point, I’d adopt the mindset Amazon founder Jeff Bezos exhibited in a talk a few years ago, when he acknowledged that nothing lasts forever. “I predict one day Amazon will fail,” he said. “Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not 100-plus years.”
Perhaps that explains why Bezos has sold more than $10 billion of Amazon shares this year and has a plan in place to regularly sell further shares. I’m sure he isn’t worried about Amazon’s near-term outlook. But it’s not inconsistent to also acknowledge that things could change. This sort of balanced view is, I think, exactly the right way to look at any investment.
My second recommendation: Take others’ opinions with a grain of salt. Recognize how easy it is to build a story about the future. Also recognize that Wall Street analysts get paid to make predictions and to sound authoritative when delivering them on TV.
I’d be especially wary of extreme predictions. You may recall that, a few weeks back, I talked about investment legend Jeremy Grantham, who is advising investors to get out of the U.S. stock market. In the end, he might be right or he might be wrong, but his prescription strikes me as extreme. I don’t question Grantham’s wisdom or his experience, but I’d be cautious of any recommendation that doesn’t sound balanced.
I’d also be especially wary of recommendations that sound alarmist. We’ve seen this repeatedly around elections. When each of the last three presidents was elected, those who weren’t the biggest fans of the new president were quick to predict a negative outcome for the economy. But instead, the market went up under President Obama, it went up under President Trump, and it’s been going up in the three or so weeks since the most recent election. People who predict doom often garner headlines—but they’re rarely right.
Simple as it sounds, I believe the best route to investment success is to build a logically diversified portfolio and to avoid making too many changes in response to recent performance, economic data, stories, predictions and opinions—especially political opinions. I don’t pretend that this is easy. It can be difficult to build a portfolio that includes investments and asset classes that have been lagging, especially if they've been lagging for a long time. But as we’ve seen this year and throughout history, trends can reverse. Just ask the Schwandts.
Adam M. Grossman’s previous articles include Getting Personal, Sweat the Big Stuff and Emerging Concerns. 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 Trends That End appeared first on HumbleDollar.
November 21, 2020
Bad Influence
KEEP AN EYE on the neighbors. They could be the reason you’re poor and unhappy.
We all like to think we’re independent thinkers who weigh the evidence and reach our own conclusions—and yet there’s ample evidence that our views are heavily influenced by those around us, whether we’re choosing presidential candidates, bottled water or mayonnaise. This extends to financial matters, sometimes with grim consequences.
Stocking up. Studies have found that those who live near one another tend to invest in a similar fashion. For instance, a 2019 study of households in Finland discovered that nearby investors tend to buy the same stocks at the same time. An earlier study documented a similar pattern in the U.S. It’s also been found that family members influence each other’s investing, with a family member more likely to start investing if a parent or child also started within the past five years.
Is this word-of-mouth investing a bad thing? It depends who’s influencing you. If your neighbor is a fan of total market index funds, he or she may steer you onto the right path—and thereafter the two of you may encourage each other to stay the course.
But if your neighbor is always talking about whatever’s currently hot—bitcoin, Zoom, Tesla, you name it—there’s a risk you’ll find yourself dabbling in the same pricey merchandise, possibly to your regret. What to do? Whenever folks boast to me about their latest speculative bet or proffer some prediction about the market’s direction, I smile noncommittally and say as little as possible, in part because I don’t want their views to poison my portfolio.
Spending wildly. We’ve long known that folks often try to “keep up with the Joneses,” spending money to mimic their neighbors’ lavish lifestyle and to signal their own financial success. This is a dangerous game. We can end up spending heavily on items we don’t really care about, while also failing to save enough for retirement and other important goals.
But it turns out this game is even more dangerous than I imagined. A 2018 study from the Federal Reserve Bank of Philadelphia looked at the influence of Canadian lottery ticket winners on their neighbors. The study’s finding: “[T]he larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood.”
It seems that, in an effort to keep up with the local high-spending lottery ticket winner, the neighbors engaged in their own conspicuous consumption. That often required borrowing money, resulting in bankruptcy for some. These bankrupt neighbors also started taking more risk with their investment portfolio, presumably as another way to finance their increased spending.
A similar phenomenon was found among the neighbors of recent Dutch lottery ticket winners. The neighbors were far more likely to purchase a new car in the months afterward. Why a car? It seems it’s all about the enduring signal that the new vehicle sends to others in the neighborhood. As the authors note, “Unlike an expensive party or vacation, a household’s neighbors are continuously reminded of [the family’s] new car.”
To fend off such foolishness, perhaps our best bet is to remember the lesson of The Millionaire Next Door: The wealthiest family in the neighborhood is often the family that you don’t realize is rich—because they aren’t wasting their money on new cars, expensive landscaping and designer clothes.
Eyeing unhappily. Since the early 1970s, inflation-adjusted per-capita disposable income has ballooned 135% in the U.S., and yet our reported level of happiness has barely budged. All this money, it seems, hasn’t bought happiness. Why not? We apparently care less about our absolute standard of living and more about how our income compares to others.
What if we have high income-earners as our neighbors? That makes things even worse. “I find that, controlling for an individual's own income, higher earnings of neighbors are associated with lower levels of self-reported happiness,” writes economics professor Erzo Luttmer in a 2005 study that’s aptly titled “Neighbors as Negatives.”
This is a reason to avoid situations where you’re reminded that others are far better off. Maybe you shouldn’t seek out wealthy friends. Maybe you shouldn’t visit vacation resorts you can barely afford or buy a house in a town where most of your neighbors will be richer. In fact, I’m a fan of the opposite strategy—living where you can have the quiet confidence of the millionaire next door.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"As I read up on the cost of college, it hit me that I needed to change my thinking and fast," recalls Andrew Forsythe. "The guy who would pay hundreds for a Hickey Freeman suit started clipping grocery store coupons."
Don't put off your retirement wish list until you fully retire, advises Dennis Friedman—or you may never get the chance to do the things you dreamed of.
"There are many roads to Rome," writes Adam Grossman. "You shouldn’t worry if you want to use some of your funds in ways that others might deem emotional, idiosyncratic or inconsistent."
Why do so many investors abandon stocks during market declines? It isn't a lack of knowledge, says Joe Kesler, but rather "failing to accept in advance the psychological cost of being a buy-and-hold investor."
Want to make sure you’re prepared for retirement—and make the most of it once you quit the workforce? Dick Quinn offers 10 pointers inspired by 10 U.S. and U.K. television shows.
Funds that use environmental, social and governance criteria are booming, notes Rick Connor. But what do you get when you buy these funds—and will they be a good investment?
Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Never Assume, Future Shock and Scary Stuff.
We all like to think we’re independent thinkers who weigh the evidence and reach our own conclusions—and yet there’s ample evidence that our views are heavily influenced by those around us, whether we’re choosing presidential candidates, bottled water or mayonnaise. This extends to financial matters, sometimes with grim consequences.
Stocking up. Studies have found that those who live near one another tend to invest in a similar fashion. For instance, a 2019 study of households in Finland discovered that nearby investors tend to buy the same stocks at the same time. An earlier study documented a similar pattern in the U.S. It’s also been found that family members influence each other’s investing, with a family member more likely to start investing if a parent or child also started within the past five years.
Is this word-of-mouth investing a bad thing? It depends who’s influencing you. If your neighbor is a fan of total market index funds, he or she may steer you onto the right path—and thereafter the two of you may encourage each other to stay the course.
But if your neighbor is always talking about whatever’s currently hot—bitcoin, Zoom, Tesla, you name it—there’s a risk you’ll find yourself dabbling in the same pricey merchandise, possibly to your regret. What to do? Whenever folks boast to me about their latest speculative bet or proffer some prediction about the market’s direction, I smile noncommittally and say as little as possible, in part because I don’t want their views to poison my portfolio.
Spending wildly. We’ve long known that folks often try to “keep up with the Joneses,” spending money to mimic their neighbors’ lavish lifestyle and to signal their own financial success. This is a dangerous game. We can end up spending heavily on items we don’t really care about, while also failing to save enough for retirement and other important goals.
But it turns out this game is even more dangerous than I imagined. A 2018 study from the Federal Reserve Bank of Philadelphia looked at the influence of Canadian lottery ticket winners on their neighbors. The study’s finding: “[T]he larger the dollar magnitude of a lottery prize of one individual in a very small neighborhood, the more subsequent bankruptcies there will be from other individuals in that neighborhood.”
It seems that, in an effort to keep up with the local high-spending lottery ticket winner, the neighbors engaged in their own conspicuous consumption. That often required borrowing money, resulting in bankruptcy for some. These bankrupt neighbors also started taking more risk with their investment portfolio, presumably as another way to finance their increased spending.
A similar phenomenon was found among the neighbors of recent Dutch lottery ticket winners. The neighbors were far more likely to purchase a new car in the months afterward. Why a car? It seems it’s all about the enduring signal that the new vehicle sends to others in the neighborhood. As the authors note, “Unlike an expensive party or vacation, a household’s neighbors are continuously reminded of [the family’s] new car.”
To fend off such foolishness, perhaps our best bet is to remember the lesson of The Millionaire Next Door: The wealthiest family in the neighborhood is often the family that you don’t realize is rich—because they aren’t wasting their money on new cars, expensive landscaping and designer clothes.
Eyeing unhappily. Since the early 1970s, inflation-adjusted per-capita disposable income has ballooned 135% in the U.S., and yet our reported level of happiness has barely budged. All this money, it seems, hasn’t bought happiness. Why not? We apparently care less about our absolute standard of living and more about how our income compares to others.
What if we have high income-earners as our neighbors? That makes things even worse. “I find that, controlling for an individual's own income, higher earnings of neighbors are associated with lower levels of self-reported happiness,” writes economics professor Erzo Luttmer in a 2005 study that’s aptly titled “Neighbors as Negatives.”
This is a reason to avoid situations where you’re reminded that others are far better off. Maybe you shouldn’t seek out wealthy friends. Maybe you shouldn’t visit vacation resorts you can barely afford or buy a house in a town where most of your neighbors will be richer. In fact, I’m a fan of the opposite strategy—living where you can have the quiet confidence of the millionaire next door.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"As I read up on the cost of college, it hit me that I needed to change my thinking and fast," recalls Andrew Forsythe. "The guy who would pay hundreds for a Hickey Freeman suit started clipping grocery store coupons."
Don't put off your retirement wish list until you fully retire, advises Dennis Friedman—or you may never get the chance to do the things you dreamed of.
"There are many roads to Rome," writes Adam Grossman. "You shouldn’t worry if you want to use some of your funds in ways that others might deem emotional, idiosyncratic or inconsistent."
Why do so many investors abandon stocks during market declines? It isn't a lack of knowledge, says Joe Kesler, but rather "failing to accept in advance the psychological cost of being a buy-and-hold investor."
Want to make sure you’re prepared for retirement—and make the most of it once you quit the workforce? Dick Quinn offers 10 pointers inspired by 10 U.S. and U.K. television shows.
Funds that use environmental, social and governance criteria are booming, notes Rick Connor. But what do you get when you buy these funds—and will they be a good investment?
Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Never Assume, Future Shock and Scary Stuff.The post Bad Influence appeared first on HumbleDollar.
November 20, 2020
For Goodness Sake
AS YOU STRIVE to do well, should you also strive to do good?
We’re seeing a boom in environmental, social and governance (ESG) investing. For instance, according to a recent Morningstar report, there are now 534 index mutual funds and exchange-traded funds (ETFs) around the world that screen their holdings using ESG criteria. Together, these funds have almost $250 billion in assets—more than twice the sum they had three years earlier.
ESG investing offers a way to invest in funds that consider issues such as the use of natural resources, community impact and gender diversity on corporate boards. Intrigued? Fidelity Investments has six ESG stock and bond mutual funds. Meanwhile, Vanguard Group has two ESG stock mutual funds and two ESG stock ETFs, plus its recently launched ESG U.S. Corporate Bond ETF.
Funds incorporate ESG strategies in a variety of ways. Some integrate ESG factors with traditional investment analysis. Others perform portfolio screening, looking either to exclude (like cigarettes) or include (like green energy) specific sectors or companies. They might also consider investments based on a company’s advocacy, such as its charitable endeavors. Finally, ESG funds could focus on impact investing, by targeting investments with an eye to having a positive societal or environmental impact. All these strategies are supposed to provide a competitive financial return.
Consider Vanguard’s FTSE Social Index Fund Admiral Shares (VFTAX). It currently tracks the performance of the FTSE4Good U.S. Select Index. That index excludes stocks of certain companies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling and nuclear power. The index also excludes stocks of certain companies that don’t meet the standards of the U.N. Global Compact principles and companies that don’t meet certain diversity criteria. The fund has a 0.14% annual expense ratio, equal to 14 cents a year for every $100 invested.
The Admiral version of the Vanguard fund is fairly new, so it’s hard to judge its performance. But we can look at the returns of the index and at how well the fund matches that index. The FTSE index, coupled with an earlier index tracked by the Vanguard fund, has a 10-year annualized return of 14.3%. By comparison, the S&P 500 has a 13% return over the same period. The Vanguard fund's Admiral Shares have only been around since February 2019. During that time, the index has returned 17.09%, while the fund has returned 16.95%.
I compared the Vanguard fund’s holdings to the S&P 500’s holdings. The Vanguard fund has 471 positions. Of the top 50 holdings in the S&P 500, 44 are in the Vanguard fund. The first six holdings are identical. Surprisingly, Berkshire Hathaway, No. 7 in the S&P 500 by market capitalization, is not one of the Vanguard fund’s holdings. Also absent from the Vanguard fund are the oil giants and the big defense contractors. A casual comparison gives the impression that the Vanguard fund is simply the S&P 500 with some notable companies subtracted. That said, you will find that Tesla—not currently in the S&P 500, but soon to join the index—ranked as the Vanguard fund’s ninth largest holding as of Sept. 30.
ESG funds are not without controversy. Famed investment author Burton Malkiel recently wrote about ESG investing in The Wall Street Journal. Malkiel noted that the various agencies that rate companies on ESG criteria often disagree. Moreover, he says their ratings “tend to be divorced from considerations of how environmental, social and governance performance can influence future financial results.”
Malkiel gives the example of Xcel Energy. The company currently has one of the biggest carbon footprints in the electric utility industry. This is because Xcel generates a large share of its power from coal. But as Malkiel explains, Xcel is also the first U.S. utility committed to going 100% carbon-free by 2050 and it’s a leader in building wind-generation facilities.
Many ESG funds would exclude Xcel due to its carbon emissions. But others may look at its investment in green energy and choose to invest based on the company’s potential impact and future profitability.
The upshot: Investors can’t always be sure their ESG funds are having the desired impact. On top of that, despite strong recent returns, there’s no guarantee that future performance will keep up with the broad indices. As ESG investors shun unlovable companies and thereby help to depress their share prices, they could potentially set those stocks up for higher future returns—and those returns would be earned by investors who ignore ESG criteria.
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 That Monthly Check, Margin of Safety and State of Taxation. Follow Rick on Twitter @RConnor609.
We’re seeing a boom in environmental, social and governance (ESG) investing. For instance, according to a recent Morningstar report, there are now 534 index mutual funds and exchange-traded funds (ETFs) around the world that screen their holdings using ESG criteria. Together, these funds have almost $250 billion in assets—more than twice the sum they had three years earlier.
ESG investing offers a way to invest in funds that consider issues such as the use of natural resources, community impact and gender diversity on corporate boards. Intrigued? Fidelity Investments has six ESG stock and bond mutual funds. Meanwhile, Vanguard Group has two ESG stock mutual funds and two ESG stock ETFs, plus its recently launched ESG U.S. Corporate Bond ETF.
Funds incorporate ESG strategies in a variety of ways. Some integrate ESG factors with traditional investment analysis. Others perform portfolio screening, looking either to exclude (like cigarettes) or include (like green energy) specific sectors or companies. They might also consider investments based on a company’s advocacy, such as its charitable endeavors. Finally, ESG funds could focus on impact investing, by targeting investments with an eye to having a positive societal or environmental impact. All these strategies are supposed to provide a competitive financial return.
Consider Vanguard’s FTSE Social Index Fund Admiral Shares (VFTAX). It currently tracks the performance of the FTSE4Good U.S. Select Index. That index excludes stocks of certain companies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling and nuclear power. The index also excludes stocks of certain companies that don’t meet the standards of the U.N. Global Compact principles and companies that don’t meet certain diversity criteria. The fund has a 0.14% annual expense ratio, equal to 14 cents a year for every $100 invested.
The Admiral version of the Vanguard fund is fairly new, so it’s hard to judge its performance. But we can look at the returns of the index and at how well the fund matches that index. The FTSE index, coupled with an earlier index tracked by the Vanguard fund, has a 10-year annualized return of 14.3%. By comparison, the S&P 500 has a 13% return over the same period. The Vanguard fund's Admiral Shares have only been around since February 2019. During that time, the index has returned 17.09%, while the fund has returned 16.95%.
I compared the Vanguard fund’s holdings to the S&P 500’s holdings. The Vanguard fund has 471 positions. Of the top 50 holdings in the S&P 500, 44 are in the Vanguard fund. The first six holdings are identical. Surprisingly, Berkshire Hathaway, No. 7 in the S&P 500 by market capitalization, is not one of the Vanguard fund’s holdings. Also absent from the Vanguard fund are the oil giants and the big defense contractors. A casual comparison gives the impression that the Vanguard fund is simply the S&P 500 with some notable companies subtracted. That said, you will find that Tesla—not currently in the S&P 500, but soon to join the index—ranked as the Vanguard fund’s ninth largest holding as of Sept. 30.
ESG funds are not without controversy. Famed investment author Burton Malkiel recently wrote about ESG investing in The Wall Street Journal. Malkiel noted that the various agencies that rate companies on ESG criteria often disagree. Moreover, he says their ratings “tend to be divorced from considerations of how environmental, social and governance performance can influence future financial results.”
Malkiel gives the example of Xcel Energy. The company currently has one of the biggest carbon footprints in the electric utility industry. This is because Xcel generates a large share of its power from coal. But as Malkiel explains, Xcel is also the first U.S. utility committed to going 100% carbon-free by 2050 and it’s a leader in building wind-generation facilities.
Many ESG funds would exclude Xcel due to its carbon emissions. But others may look at its investment in green energy and choose to invest based on the company’s potential impact and future profitability.
The upshot: Investors can’t always be sure their ESG funds are having the desired impact. On top of that, despite strong recent returns, there’s no guarantee that future performance will keep up with the broad indices. As ESG investors shun unlovable companies and thereby help to depress their share prices, they could potentially set those stocks up for higher future returns—and those returns would be earned by investors who ignore ESG criteria.
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 That Monthly Check, Margin of Safety and State of Taxation. Follow Rick on Twitter @RConnor609.The post For Goodness Sake appeared first on HumbleDollar.
November 19, 2020
Prepare for Pain
WHEN I THINK about investment advisors selling high-fee products, it brings to mind the story of two politicians who were shouting at each other. One of them stands up and screams, “You’re lying!” The other one answers, “Yes, I am, but hear me out!”
In my 40 years of investing, I’ve bought into some questionable sales pitches. You’ve heard them: “The easy money’s been made. It’s going to be a stock picker’s market going forward.” Or: “Only losers are satisfied with just earning the market averages, and we want to put you in funds that beat the averages.”
Fortunately, this intellectual battle is over for those everyday investors who are paying attention and have adopted a long-term buy-and-hold philosophy. The folly of investing in the latest hot mutual fund or stock has been debunked thanks to wise sages like the late John Bogle, founder of Vanguard Group.
He succinctly described his long-term investment philosophy using index funds: "[T]he winning strategy is to own all the nation’s publicly held businesses at very low cost. By doing so you are guaranteed to capture almost the entire return they generate in the form of dividends and earnings growth.”
But there’s another ongoing battle that’s waged in the minds of long-term investors—and it’s less intellectual and more psychological. This battle involves the inner voice that starts talking to us every time there’s a stock market downturn that plays on our fears and doubts. I’ve watched investors over the years cash out of the market just as it bottoms. When stocks rebound and recoup their losses, the regret of bailing out at the bottom haunts these investors.
There’s a number of reasons investors make this same mistake time after time, but I want to focus on two of the big ones: failing to accept in advance the psychological cost of being a buy-and-hold investor and failing to manage our investment time horizon.
Consider an analogy from the exercise world. My first job after college was working for the Department of the Treasury as a bank examiner. I traveled around the Midwest from bank to bank and was given an expense account—and that’s where the problem started.
Growing up, I can only remember going to a restaurant a few times with my parents. When I was given that expense account, I found myself in heaven every night, enjoying one buffet after another, all at government expense. Even with the metabolism of a 23-year-old, I began to pack on the pounds.
Fortunately, I worked with a marathoner who ran every day after work. Because of his influence, I took up the sport and have now kept it up for more than 40 years.
The benefits have been great. Immediately, I shed the unwanted pounds and learned how to manage stress better. Longer term, I think regularly running over the decades has contributed to my current ability to still run and hike in my 60s. And there are occasional moments of extreme delight, as I run watching a beautiful sunrise or just feel one with nature as the endorphins kick in.
But the costs have been real, too. Sacrificing an extra hour of sleep before work was tough. Running in the cold Montana winters can be bone chilling. On some days, I just don’t feel like it, but I know that’s the price I have to pay to achieve the health benefits I want. After 40 years, I also know it works and that the costs are worth it.
This is how things work in life more generally. There’s a cost to be paid to achieve success. But for some reason, we don’t expect to pay a big psychological price to be a successful investor. My contention: Not considering the psychological cost of down markets may be the primary reason some bail out of stocks at just the wrong time.
We objectively look at the evidence of how the market has performed over long periods of time, and we decide we want to invest and grow wealthy, too. We don’t, however, properly factor in the inevitable cost we’ll endure when those dramatic dips in share prices occur. When our 401(k)’s value drops sharply, the resulting fear, regret, embarrassment and self-doubt are costs that aren’t easily factored into our analytical models. In fact, until we actually experience it, it’s hard to imagine the stress of a downturn and watching our retirement nest egg shrink by 30% in just a few weeks.
During these emotional times, we’re especially susceptible to the siren call of a market-timing pitch that promises all the market’s gains without the stressful losses. Problem is, those temporary losses are the price that has to be paid to enjoy the long-term success we desire.
I like Warren Buffett’s advice to see a market decline as stocks going on sale. That’s a great way to look at it—unless you’re at the end of your prime earning years. If we need to cash out of stocks in a down market to pay for retirement or other expenses, his advice doesn’t help at all. Result: We need a second strategy to mitigate this risk.
For those of us toward the end of our careers, I really like combining long-term buy-and-hold diversified stock-index fund investing with the low stress benefits of a bucket approach to managing our finances. In other words, to keep from panicking when the market drops, try to keep stock investments in a “bucket” that you don’t need to draw on for at least five years or, better yet, for 10 years. Meanwhile, funds you’ll need in the near future, such as buying groceries next week or replacing the car next year, should go in less volatile places, like short-term bond funds or money market accounts.
Kiplinger’s magazine recently had a chart listing the probability of negative returns for the S&P 500 over various time periods since 1929. While there’s a 46% probability of loss on any given day, the loss probability drops steadily over time and is just 11% over five years and 6% over 10 years.
Based on these probabilities and my bucket approach, when I lose money in the stock market, I can honestly assure my wife that it’s money we don’t need for several years and we have a high probability of gaining it back, plus some. That’s a much better conversation than explaining why we can’t take the vacation this year because I just lost our travel budget.
Joe Kesler is the author of
Smart Money with Purpose
and the founder of a
website
with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers. Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Joe's previous articles were Doing Good, True Wealth and Life as a Loan Shark.
In my 40 years of investing, I’ve bought into some questionable sales pitches. You’ve heard them: “The easy money’s been made. It’s going to be a stock picker’s market going forward.” Or: “Only losers are satisfied with just earning the market averages, and we want to put you in funds that beat the averages.”
Fortunately, this intellectual battle is over for those everyday investors who are paying attention and have adopted a long-term buy-and-hold philosophy. The folly of investing in the latest hot mutual fund or stock has been debunked thanks to wise sages like the late John Bogle, founder of Vanguard Group.
He succinctly described his long-term investment philosophy using index funds: "[T]he winning strategy is to own all the nation’s publicly held businesses at very low cost. By doing so you are guaranteed to capture almost the entire return they generate in the form of dividends and earnings growth.”
But there’s another ongoing battle that’s waged in the minds of long-term investors—and it’s less intellectual and more psychological. This battle involves the inner voice that starts talking to us every time there’s a stock market downturn that plays on our fears and doubts. I’ve watched investors over the years cash out of the market just as it bottoms. When stocks rebound and recoup their losses, the regret of bailing out at the bottom haunts these investors.
There’s a number of reasons investors make this same mistake time after time, but I want to focus on two of the big ones: failing to accept in advance the psychological cost of being a buy-and-hold investor and failing to manage our investment time horizon.
Consider an analogy from the exercise world. My first job after college was working for the Department of the Treasury as a bank examiner. I traveled around the Midwest from bank to bank and was given an expense account—and that’s where the problem started.
Growing up, I can only remember going to a restaurant a few times with my parents. When I was given that expense account, I found myself in heaven every night, enjoying one buffet after another, all at government expense. Even with the metabolism of a 23-year-old, I began to pack on the pounds.
Fortunately, I worked with a marathoner who ran every day after work. Because of his influence, I took up the sport and have now kept it up for more than 40 years.
The benefits have been great. Immediately, I shed the unwanted pounds and learned how to manage stress better. Longer term, I think regularly running over the decades has contributed to my current ability to still run and hike in my 60s. And there are occasional moments of extreme delight, as I run watching a beautiful sunrise or just feel one with nature as the endorphins kick in.
But the costs have been real, too. Sacrificing an extra hour of sleep before work was tough. Running in the cold Montana winters can be bone chilling. On some days, I just don’t feel like it, but I know that’s the price I have to pay to achieve the health benefits I want. After 40 years, I also know it works and that the costs are worth it.
This is how things work in life more generally. There’s a cost to be paid to achieve success. But for some reason, we don’t expect to pay a big psychological price to be a successful investor. My contention: Not considering the psychological cost of down markets may be the primary reason some bail out of stocks at just the wrong time.
We objectively look at the evidence of how the market has performed over long periods of time, and we decide we want to invest and grow wealthy, too. We don’t, however, properly factor in the inevitable cost we’ll endure when those dramatic dips in share prices occur. When our 401(k)’s value drops sharply, the resulting fear, regret, embarrassment and self-doubt are costs that aren’t easily factored into our analytical models. In fact, until we actually experience it, it’s hard to imagine the stress of a downturn and watching our retirement nest egg shrink by 30% in just a few weeks.
During these emotional times, we’re especially susceptible to the siren call of a market-timing pitch that promises all the market’s gains without the stressful losses. Problem is, those temporary losses are the price that has to be paid to enjoy the long-term success we desire.
I like Warren Buffett’s advice to see a market decline as stocks going on sale. That’s a great way to look at it—unless you’re at the end of your prime earning years. If we need to cash out of stocks in a down market to pay for retirement or other expenses, his advice doesn’t help at all. Result: We need a second strategy to mitigate this risk.
For those of us toward the end of our careers, I really like combining long-term buy-and-hold diversified stock-index fund investing with the low stress benefits of a bucket approach to managing our finances. In other words, to keep from panicking when the market drops, try to keep stock investments in a “bucket” that you don’t need to draw on for at least five years or, better yet, for 10 years. Meanwhile, funds you’ll need in the near future, such as buying groceries next week or replacing the car next year, should go in less volatile places, like short-term bond funds or money market accounts.
Kiplinger’s magazine recently had a chart listing the probability of negative returns for the S&P 500 over various time periods since 1929. While there’s a 46% probability of loss on any given day, the loss probability drops steadily over time and is just 11% over five years and 6% over 10 years.
Based on these probabilities and my bucket approach, when I lose money in the stock market, I can honestly assure my wife that it’s money we don’t need for several years and we have a high probability of gaining it back, plus some. That’s a much better conversation than explaining why we can’t take the vacation this year because I just lost our travel budget.
Joe Kesler is the author of
Smart Money with Purpose
and the founder of a
website
with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers. Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Joe's previous articles were Doing Good, True Wealth and Life as a Loan Shark.The post Prepare for Pain appeared first on HumbleDollar.
November 18, 2020
Don’t Delay
I’M GOING TO BE 70 next year and I think I’m in pretty good shape. I do 25 pushups before bed, along with some stretching. I usually go for a long walk in the morning and, once in a while, I might head out for a hike. On top of that, I do strengthening exercises three times a week.
I don’t take medication or have any chronic ailments. Of course, you can never be sure what’s going on with your body, because so many things can go undetected. Still, I think I’m okay physically.
Instead, what’s been on my mind lately has been my mind. I know I’ve been slipping. I’m reminded when I head out in the car with my wife and she uses her finger to point which way to go. She knows from experience that I sometimes head off in the wrong direction, even when we’re driving to places that I’ve been countless times.
We can be lying in bed and she’ll whisper, “Honey, did you leave the keys in the front door?” I’ve done that on multiple occasions, too.
My wife is the best judge of how well I’m doing health-wise. Who could be a better judge than the person who knows me best? She doesn’t have to say anything, because I can tell by her actions that she, too, knows I’m slipping mentally.
I know it could be an overreaction on my part, because I can still function like a normal person. But the question is, for how long? That’s also on my mind.
The first time I realized that I might have lost a few too many brain cells was when I was the trustee for my mother’s estate. As I was filling out all the paperwork, I realized I was making too many dumb mistakes, such as not signing documents. I’ve come a long way from the guy who made a career by paying close attention to detail.
Now that I’m approaching age 70, I feel a sense of urgency to get on with my retirement. Sometimes, I feel time is running out. Some of this urgency could come from COVID-19, during which many of us feel like our life is on hold.
If there were do-overs in life, I’d probably have taken time away from work in my early 50s to do some of the things I planned to do once I was fully retired. Instead, I waited until I quit work to do those things—and that might have been the wrong decision.
Almost immediately, I had caregiving responsibilities for my parents and now we have this pandemic, and together they’ve kept me from doing the things I planned on doing in retirement. It’s been 11 years and counting since I quit work, and I’m still waiting to experience fully what retirement life is all about. Hopefully, when this public health crisis is over, I can start enjoying my retirement more.
If I had reduced my hours at work at age 50, I’d probably still have been in pretty good shape financially. Why? Thanks to compounding, all that money you invested early in life is far more important than the money you invest later.
It might not be ideal for everyone to cut back on their workload in their 50s. But if you have your house almost paid off and the kids are no longer at home, it could be a good time to enjoy life more.
You might frown at your coworker who took off from work for a couple of months to travel and visit long-lost friends. But the joke might be on you if you wait until retirement to start enjoying life more. You never know what lies ahead. Putting off your retirement wish list until you can fully retire is a risky proposition.
I don’t say you should necessarily quit work and retire early. But I’d encourage you to spend more time enjoying life, instead of accumulating more wealth that might not be needed.
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 Try Not to Slip, Go Long and The Short Game. Follow Dennis on Twitter @DMFrie.
I don’t take medication or have any chronic ailments. Of course, you can never be sure what’s going on with your body, because so many things can go undetected. Still, I think I’m okay physically.
Instead, what’s been on my mind lately has been my mind. I know I’ve been slipping. I’m reminded when I head out in the car with my wife and she uses her finger to point which way to go. She knows from experience that I sometimes head off in the wrong direction, even when we’re driving to places that I’ve been countless times.
We can be lying in bed and she’ll whisper, “Honey, did you leave the keys in the front door?” I’ve done that on multiple occasions, too.
My wife is the best judge of how well I’m doing health-wise. Who could be a better judge than the person who knows me best? She doesn’t have to say anything, because I can tell by her actions that she, too, knows I’m slipping mentally.
I know it could be an overreaction on my part, because I can still function like a normal person. But the question is, for how long? That’s also on my mind.
The first time I realized that I might have lost a few too many brain cells was when I was the trustee for my mother’s estate. As I was filling out all the paperwork, I realized I was making too many dumb mistakes, such as not signing documents. I’ve come a long way from the guy who made a career by paying close attention to detail.
Now that I’m approaching age 70, I feel a sense of urgency to get on with my retirement. Sometimes, I feel time is running out. Some of this urgency could come from COVID-19, during which many of us feel like our life is on hold.
If there were do-overs in life, I’d probably have taken time away from work in my early 50s to do some of the things I planned to do once I was fully retired. Instead, I waited until I quit work to do those things—and that might have been the wrong decision.
Almost immediately, I had caregiving responsibilities for my parents and now we have this pandemic, and together they’ve kept me from doing the things I planned on doing in retirement. It’s been 11 years and counting since I quit work, and I’m still waiting to experience fully what retirement life is all about. Hopefully, when this public health crisis is over, I can start enjoying my retirement more.
If I had reduced my hours at work at age 50, I’d probably still have been in pretty good shape financially. Why? Thanks to compounding, all that money you invested early in life is far more important than the money you invest later.
It might not be ideal for everyone to cut back on their workload in their 50s. But if you have your house almost paid off and the kids are no longer at home, it could be a good time to enjoy life more.
You might frown at your coworker who took off from work for a couple of months to travel and visit long-lost friends. But the joke might be on you if you wait until retirement to start enjoying life more. You never know what lies ahead. Putting off your retirement wish list until you can fully retire is a risky proposition.
I don’t say you should necessarily quit work and retire early. But I’d encourage you to spend more time enjoying life, instead of accumulating more wealth that might not be needed.
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 Try Not to Slip, Go Long and The Short Game. Follow Dennis on Twitter @DMFrie.The post Don’t Delay appeared first on HumbleDollar.
November 17, 2020
The Late Show
I'VE BEEN INVOLVED in retirement planning for more than 50 years. Back in the day, my job was to calculate the pensions for 20 to 30 workers each month by hand, using multiplication and long division. Many of those new retirees were poorly prepared, but they did have a pension.
Here we are in the 21st century and I see little has changed. Lack of planning, lack of savings, widespread misinformation and reliance on inaccurate assumptions still plague Americans.
Want to make sure you’re prepared for retirement—and make the most of it once you quit the workforce? Here are 10 pointers inspired by 10 American and British television shows.
As Time Goes By. Few folks think about retirement when they're age 25. Hey, there’s plenty of time, right? Anyone who is already retired knows that isn’t true. Where did the time go? Retirement savings must start with that very first job.
Keeping Up Appearances. As our income rises, the tendency isn’t to save more, but to spend more, so the Joneses know we’ve made it. Have at it, I say, provided it’s done after you’ve set aside money for your future—and provided you aren’t financing your spending with debt.
Last of the Summer Wine. Nope, once retired, you won’t be fishing or playing golf every day and, after a few years, you probably won’t want to. So what’s the plan? Maybe plan isn’t the right word. Few of us have a plan for how we’ll spend our time over the next 20-plus years. In fact, much of your time will end up being planned for you. Trust me, it happens.
Still, take the time to think about what you’d like to do, be it traveling, regularly having lunch with friends, volunteering, taking college courses or simply reading. My wife reads two to three books a week. Me, I’m reading a history of the world. It may take a while. Yeah, and I write a lot.
Waiting for God. What drives me nuts, and I find very sad, is the worker—most often it’s a man—who thinks of retirement income as his or hers alone, ignoring the possible needs of a surviving spouse or partner. Don’t do it.
Open All Night. This 1980s British TV series is about a likable grocer who delights in modest cons aimed at the local retirees. In the real world, people who aren’t so likable also delight in taking advantage of us seniors, especially the most vulnerable, which includes those retirees desperate for a quick financial fix.
Are You Being Served? Any store you enter will be more than willing to sell you something. But will you buy? Many retirees with adequate income and plenty of savings have a tendency to be too thrifty, especially in the early years of retirement. Since I’m among them, I understand the anxiety of not wanting to run out of money. But as the years go by, it’s okay to enjoy life a little more. No, don’t go crazy. But during those decades in the workforce, you were planning for the future—and now it’s here.
Press Your Luck. This is a show all about greed and taking risk. But when it comes to saving for—and spending during—retirement, pressing your luck is not a good idea. Sure, if you don’t take sufficient risk, you may end up with insufficient funds. But taking too much risk may mean no funds at all.
This Old House. Long before retirement, it’s critical to decide not only where to live, but also what place to live in. Waiting too long to move can create great stress—and, if the upkeep on your current place is steep, perhaps money woes as well.
Antiques Roadshow. There’s scant chance you’ll discover a masterpiece in your basement, so do your children a favor: clean it up. Your treasures are your kids’ storage nightmare.
The Chase. This game show is all about using what you know to your best advantage. But when it comes to retirement, knowledge is often sadly lacking. Why, oh why, don’t people pay attention, especially when it’s in their best interest?
My former employer is making major changes in our retiree health benefits. Communications have been going out for more than a year. Open enrollment just started and many people are now claiming they don’t know what’s going on. I have no doubt many will make poor decisions. My experience tells me that, when they were employed, these folks were equally oblivious to the details of their pension and 401(k). For goodness sake, read the stuff you get from your employer, the Social Security Administration, Medicare and others.
Do you notice anything unique about the above? I hope not, because it’s all been said many times before. So why is all this relevant? A recent article on MarketWatch caught my eye. Here’s a quote: “Our data is showing that, because of the COVID recession, about 50% of workers over the age of 55 will be poor or near-poor adults when they reach 65.”
I wouldn’t buy that dire prediction, but it sure catches your attention. Don’t want to end up as a poor or near-poor retiree? Maybe you should spend less time watching TV—and a little more time focused on your finances.
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include For Your Benefit, A Seat at the Slots and Want $870,000. Follow Dick on Twitter @QuinnsComments.
The post The Late Show appeared first on HumbleDollar.
November 16, 2020
Cheap and Proud
ONCE UPON A TIME, I thought it was a little unseemly to pay a lot of attention to costs. My father grew up in a farm family with little money. He was the first to attend college and, indeed, went on to law school from there. He did well in his profession and, when I was growing up, we lived a comfortable—though far from luxurious—life.
Maybe because he’d spent his youth worried about money, my father didn’t want to be preoccupied with it after he established himself. One result: Being cost conscious wasn’t instilled in me at an early age. When I finished school and established myself in my own profession, I was pretty oblivious to costs.
As a carefree young bachelor, I thought nothing of buying suits costing several hundred dollars—a lot of money in the 1980s. Restaurants and nightclubs were a regular indulgence.
But my outlook undertook a dramatic change in 1987 when I met a beautiful young woman, with two equally beautiful young daughters, and ultimately convinced them to marry me. We wasted no time and soon had two more kids. I’d gone from carefree bachelor to father of four in a couple of years.
As I began to read up on the projected cost of college for our little tribe, it hit me like a ton of bricks that I needed to change my thinking and fast. I soon became a dedicated cheapskate, studying the long-term effects of saving vs. spending and starting us on a path—I hoped—to getting four kids through college. The guy who would pay hundreds for a Hickey Freeman suit started clipping grocery store coupons.
More important than these new frugal habits was the underlying change in my mindset. Perhaps still nagged by the feeling that there was something a little vulgar about prioritizing costs, I decided the best approach was to meet this attitude head on and embrace its opposite. I realized that there was no virtue in being a spendthrift, and instead I would take pride in being a budget hawk and driving a hard bargain in all my financial endeavors.
Around this same time, I assumed sole responsibility for managing our investments. I wasted no time in starting college accounts for those four costly educations we were anticipating. In the course of educating myself on finances, I learned the crucial importance of saving and investing in a disciplined manner over a long period of time.
I realized that spending was, of course, just the flipside of saving. I tried to ingrain in myself the habit of getting the most bang for the buck with our expenditures, so that the beneficial effect on our finances would compound over time, just as it did with our investments. It’s a philosophy that has served our family well over the years, although—when I looked over my shoulder—I’d often catch a few eye rolls from other members of the tribe.
It’s funny how the progression of generations works. Just as I eventually adopted an attitude quite different from that of my parents, our four children have learned one of the true benefits of adulthood: You get to do things differently than your parents. Our kids place more value on present gratification and don’t deny so much to themselves or their kids.
But they all work hard and make good salaries, have fewer kids—or none at all—and are probably in a better position to spend than we were. Still, I hope they understand the fundamental lesson of compounding: that any extra they manage to save and invest now, while they’re young, is actually much more important than what they put away once they’ve attained the sober outlook of middle age.
In any event, our kids all enjoy a good giggle about old Dad and his skinflint ways, even while acknowledging that it was nice to graduate from college without a penny of debt. What about the grandkids? It’ll be interesting to see what financial philosophy they end up with.
Andrew Forsythe retired in 2017 after almost four decades of practicing criminal law, first as a prosecutor and then as a defense attorney. Along with his wonderful wife, kids and grandkids, he loves dogs and collecting pocketknives. His previous articles were Slim Pickings, The Path Not Taken and Saved by a Crash.
Maybe because he’d spent his youth worried about money, my father didn’t want to be preoccupied with it after he established himself. One result: Being cost conscious wasn’t instilled in me at an early age. When I finished school and established myself in my own profession, I was pretty oblivious to costs.
As a carefree young bachelor, I thought nothing of buying suits costing several hundred dollars—a lot of money in the 1980s. Restaurants and nightclubs were a regular indulgence.
But my outlook undertook a dramatic change in 1987 when I met a beautiful young woman, with two equally beautiful young daughters, and ultimately convinced them to marry me. We wasted no time and soon had two more kids. I’d gone from carefree bachelor to father of four in a couple of years.
As I began to read up on the projected cost of college for our little tribe, it hit me like a ton of bricks that I needed to change my thinking and fast. I soon became a dedicated cheapskate, studying the long-term effects of saving vs. spending and starting us on a path—I hoped—to getting four kids through college. The guy who would pay hundreds for a Hickey Freeman suit started clipping grocery store coupons.
More important than these new frugal habits was the underlying change in my mindset. Perhaps still nagged by the feeling that there was something a little vulgar about prioritizing costs, I decided the best approach was to meet this attitude head on and embrace its opposite. I realized that there was no virtue in being a spendthrift, and instead I would take pride in being a budget hawk and driving a hard bargain in all my financial endeavors.
Around this same time, I assumed sole responsibility for managing our investments. I wasted no time in starting college accounts for those four costly educations we were anticipating. In the course of educating myself on finances, I learned the crucial importance of saving and investing in a disciplined manner over a long period of time.
I realized that spending was, of course, just the flipside of saving. I tried to ingrain in myself the habit of getting the most bang for the buck with our expenditures, so that the beneficial effect on our finances would compound over time, just as it did with our investments. It’s a philosophy that has served our family well over the years, although—when I looked over my shoulder—I’d often catch a few eye rolls from other members of the tribe.
It’s funny how the progression of generations works. Just as I eventually adopted an attitude quite different from that of my parents, our four children have learned one of the true benefits of adulthood: You get to do things differently than your parents. Our kids place more value on present gratification and don’t deny so much to themselves or their kids.
But they all work hard and make good salaries, have fewer kids—or none at all—and are probably in a better position to spend than we were. Still, I hope they understand the fundamental lesson of compounding: that any extra they manage to save and invest now, while they’re young, is actually much more important than what they put away once they’ve attained the sober outlook of middle age.
In any event, our kids all enjoy a good giggle about old Dad and his skinflint ways, even while acknowledging that it was nice to graduate from college without a penny of debt. What about the grandkids? It’ll be interesting to see what financial philosophy they end up with.
Andrew Forsythe retired in 2017 after almost four decades of practicing criminal law, first as a prosecutor and then as a defense attorney. Along with his wonderful wife, kids and grandkids, he loves dogs and collecting pocketknives. His previous articles were Slim Pickings, The Path Not Taken and Saved by a Crash.The post Cheap and Proud appeared first on HumbleDollar.
November 15, 2020
Getting Personal
I’D LIKE TO TELL you about a unique new book.
How I Invest My Money
is a compilation of personal money stories shared by 25 investment professionals. The book takes its title and inspiration from a 2019 blog post by investment advisor Josh Brown, a widely followed author and TV commentator.
Brown’s motivation: After years of on-air commentary, discussing every conceivable financial topic, it occurred to him that no one ever asks investment people how they invest their own money. It seemed like an odd omission. To address this gap, Brown teamed up with Brian Portnoy, another well-known industry voice.
The result is a unique window into the financial life—and, more important, the financial thinking—of some of the most thoughtful people in the industry.
While these 25 individuals are all different, what’s striking is that many of them echoed similar themes and described similar strategies. Most notably, in a book that’s the collective work of investment professionals, there is very little discussion of investment strategy per se. How I Invest My Money is definitely not a textbook. Instead, it’s a mosaic of how real people run their financial life.
And real people, even when they work in finance, don't always adhere to the textbook. One contributor, Leighann Miko, put it this way: “[C]ontrary to popular belief, it’s okay to make decisions that don’t make sense on paper.” Advisor Bob Seawright talked about purchasing a summer cottage in the Adirondacks. From a strictly financial point of view, he wrote, “It’s a lousy investment.” But he sees it as an investment in his children and grandchildren. In that sense, he said, it’s “the most important financial investment we’ll ever make.”
Contributor Ryan Krueger may sum it up best: “I wonder if the greatest trick the devil ever played on investors is making them think it is the investing part that matters most.”
It’s an excellent point. All too often, finance is presented through the lens of numerical analysis. Finance people use terms like efficient frontier, alpha and beta. To be sure, they’re useful concepts and, of course, everyone wants to see their wealth grow. But these concepts are one dimensional at best. The reality is, most people are also—and maybe primarily—working toward happiness and contentment.
Often, this means using money in ways that don't optimize every dollar the way that an economics textbook would dictate. Co-editor Brian Portnoy talks about the decision to pay off his mortgage. He acknowledges that it may not have been the optimal decision based on the numbers. But, he states flatly, “I don’t care.” Why not? Because he enjoys living without debt—and that's reason enough. On a similar note, Morgan Housel writes, "Our goal isn't to be coldly rational; just psychologically reasonable."
Even within their investment portfolios, none of these practitioners adheres too rigidly to any orthodoxy. Yes, they each have an investment philosophy, but they also accept the reality that there is no single “right” way to invest. One contributor, who normally advocates a conservative, dividend-focused approach, allows that she may own “a rogue position in Facebook” and “maybe a few shares of Twitter.” Similarly, co-editor Josh Brown, who generally advocates index funds, also owns individual stocks and happily invests in funds launched by friends—for the simple reason that “I believe in supporting my friends.”
Along these same lines, several contributors talked about their decision to invest early on in a new exchange-traded fund created by Perth Tolle, herself also a contributor to the book. Tolle’s unique emerging markets fund (ticker: FRDM) weights countries according to measures of economic freedom and human rights.
How I Invest My Money may be most helpful to readers in areas that traditional textbooks don’t address at all. This includes, for lack of a better term, how to organize one’s money. While academics frown on the concept, Brian Portnoy writes that “mental accounting is my friend.” He organizes his assets into four buckets: broad-market indexes, cash, real estate and “lottery tickets.” Advisor Nina O’Neal employs a set of online bank accounts to keep organized—one each for “taxes, tuition, general savings, etc.” Contributor Debbie Freeman does the same thing, with regular contributions to an account for “a dream vacation when I turn 40.”
These examples illustrate that an often-overlooked contributor to financial success is simply getting organized. “Getting organized” isn’t an end in itself. Rather, organizing your financial life allows you—and even forces you—to think more carefully about investment strategy. When your money is segmented by purpose, it’s much easier to assign each segment an appropriate strategy. How I Invest My Money provides several useful templates.
Though this book is the work of finance professionals, its audience is everyday investors. Making it especially approachable: Each chapter includes an illustration by Carl Richards, the Sketch Guy from The New York Times.
How I Invest My Money is a collection of ideas and not necessarily an actionable field guide. Some might view that as a weakness. But at its core, that is precisely the book’s message. Yes, you should use your money wisely. But there are many roads to Rome. You shouldn’t worry if you want to use some of your funds in ways that others might deem emotional, idiosyncratic or inconsistent.
“Life isn’t always consistent,” Josh Brown says, and that’s okay. "Success in life," Christine Benz writes, “is all about finding balance.” I couldn't agree more.
Adam M. Grossman’s previous articles include Sweat the Big Stuff, Emerging Concerns and Look Under the Hood. 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.
Brown’s motivation: After years of on-air commentary, discussing every conceivable financial topic, it occurred to him that no one ever asks investment people how they invest their own money. It seemed like an odd omission. To address this gap, Brown teamed up with Brian Portnoy, another well-known industry voice.
The result is a unique window into the financial life—and, more important, the financial thinking—of some of the most thoughtful people in the industry.
While these 25 individuals are all different, what’s striking is that many of them echoed similar themes and described similar strategies. Most notably, in a book that’s the collective work of investment professionals, there is very little discussion of investment strategy per se. How I Invest My Money is definitely not a textbook. Instead, it’s a mosaic of how real people run their financial life.
And real people, even when they work in finance, don't always adhere to the textbook. One contributor, Leighann Miko, put it this way: “[C]ontrary to popular belief, it’s okay to make decisions that don’t make sense on paper.” Advisor Bob Seawright talked about purchasing a summer cottage in the Adirondacks. From a strictly financial point of view, he wrote, “It’s a lousy investment.” But he sees it as an investment in his children and grandchildren. In that sense, he said, it’s “the most important financial investment we’ll ever make.”
Contributor Ryan Krueger may sum it up best: “I wonder if the greatest trick the devil ever played on investors is making them think it is the investing part that matters most.”
It’s an excellent point. All too often, finance is presented through the lens of numerical analysis. Finance people use terms like efficient frontier, alpha and beta. To be sure, they’re useful concepts and, of course, everyone wants to see their wealth grow. But these concepts are one dimensional at best. The reality is, most people are also—and maybe primarily—working toward happiness and contentment.
Often, this means using money in ways that don't optimize every dollar the way that an economics textbook would dictate. Co-editor Brian Portnoy talks about the decision to pay off his mortgage. He acknowledges that it may not have been the optimal decision based on the numbers. But, he states flatly, “I don’t care.” Why not? Because he enjoys living without debt—and that's reason enough. On a similar note, Morgan Housel writes, "Our goal isn't to be coldly rational; just psychologically reasonable."
Even within their investment portfolios, none of these practitioners adheres too rigidly to any orthodoxy. Yes, they each have an investment philosophy, but they also accept the reality that there is no single “right” way to invest. One contributor, who normally advocates a conservative, dividend-focused approach, allows that she may own “a rogue position in Facebook” and “maybe a few shares of Twitter.” Similarly, co-editor Josh Brown, who generally advocates index funds, also owns individual stocks and happily invests in funds launched by friends—for the simple reason that “I believe in supporting my friends.”
Along these same lines, several contributors talked about their decision to invest early on in a new exchange-traded fund created by Perth Tolle, herself also a contributor to the book. Tolle’s unique emerging markets fund (ticker: FRDM) weights countries according to measures of economic freedom and human rights.
How I Invest My Money may be most helpful to readers in areas that traditional textbooks don’t address at all. This includes, for lack of a better term, how to organize one’s money. While academics frown on the concept, Brian Portnoy writes that “mental accounting is my friend.” He organizes his assets into four buckets: broad-market indexes, cash, real estate and “lottery tickets.” Advisor Nina O’Neal employs a set of online bank accounts to keep organized—one each for “taxes, tuition, general savings, etc.” Contributor Debbie Freeman does the same thing, with regular contributions to an account for “a dream vacation when I turn 40.”
These examples illustrate that an often-overlooked contributor to financial success is simply getting organized. “Getting organized” isn’t an end in itself. Rather, organizing your financial life allows you—and even forces you—to think more carefully about investment strategy. When your money is segmented by purpose, it’s much easier to assign each segment an appropriate strategy. How I Invest My Money provides several useful templates.
Though this book is the work of finance professionals, its audience is everyday investors. Making it especially approachable: Each chapter includes an illustration by Carl Richards, the Sketch Guy from The New York Times.
How I Invest My Money is a collection of ideas and not necessarily an actionable field guide. Some might view that as a weakness. But at its core, that is precisely the book’s message. Yes, you should use your money wisely. But there are many roads to Rome. You shouldn’t worry if you want to use some of your funds in ways that others might deem emotional, idiosyncratic or inconsistent.
“Life isn’t always consistent,” Josh Brown says, and that’s okay. "Success in life," Christine Benz writes, “is all about finding balance.” I couldn't agree more.
Adam M. Grossman’s previous articles include Sweat the Big Stuff, Emerging Concerns and Look Under the Hood. 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 Getting Personal appeared first on HumbleDollar.
November 14, 2020
Never Assume
THROUGHOUT THE DAY, we make countless snap judgments, often without realizing it. Think about navigating the grocery store. This involves a blizzard of decisions—which brand, what size, whether it’s good value, will it stay fresh—and yet we do so almost effortlessly.
Most of the time, this is a good thing. If we carefully pondered the assumptions behind every judgment we make, life would become painfully unproductive. Still, it’s helpful occasionally to question whether we’re misjudging the world, especially when it comes to major issues, financial and otherwise. Examples? Here are 35 assumptions we shouldn’t make:
That people who are richer are happier.
That a fund’s past performance will repeat.
That other points of view are without merit.
That endless relaxation is what we really want.
That stock market investors—in aggregate—care greatly about anything other than interest rates and future corporate earnings.
That our future self won’t regret the money we’re merrily spending today.
That great companies will be great stocks.
That an insurance agent is selling us the best investment products for our financial future.
That an item on sale is a bargain.
That our immediate reaction is the right one.
That sophisticated investment products and strategies deliver better returns.
That paying less in taxes is always financially smart.
That silence means someone agrees with us.
That the collective judgment of investors, as reflected in market prices, is wrong.
That people who claim to beat the market actually have.
That we’ll have the same high tolerance for risk when share prices are 30% lower.
That we’re being rational.
That investment experts pontificating on TV have any clue what will happen next in the economy and the financial markets.
That friends and family are telling us the unvarnished truth.
That material progress—the bigger house, the faster car, the next pay raise—will deliver lasting happiness.
That a fee-only financial advisor has no conflicts of interest.
That financial reporters fully understand what they’re talking or writing about.
That how we think we’re perceived is how we’re perceived.
That those who are most insistent or passionate are most likely to be correct.
That extraordinary career and investment success is all about talent and hard work—and that luck plays no role.
That last year’s insurance coverage still fits our circumstances today.
That high investment costs are an indication we’re getting something special.
That our home will be a great investment.
That we instinctively know what will make us happy.
That our life in the years ahead will be similar to today.
That we know something other investors don’t.
That people who appear wealthy actually are wealthy.
That our recollection is correct.
That our thinking isn’t swayed by the investment mob’s euphoria and despair.
That, when the job is finally done, we’ll feel a lasting sense of triumph.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"The sunk cost trap is everywhere because we’re taught that successful people never give up, but instead always move forward," writes Jim Wasserman. "Unfortunately, this can also lead to prolonged failure."
In the late 1990s, Andrew Forsythe wanted to invest part of his portfolio in individual stocks. His strategy: only buy stocks recommended by multiple experts. Result? It wasn't good.
"We may not be done with our simplifying," says Brian White. "When I get tired of managing our investments, I’ll just move all our money into a Vanguard target-date fund or one of the firm’s target-risk funds."
Confused about the Social Security earnings test and about how benefits are taxed? Richard Connor offers a refresher course on both topics.
"Your real benchmark isn’t beating the stock market," argues Robin Powell. "Instead, it’s how you’re performing relative to the goals that you’ve set."
Worried about how much you spend on, say, vacations or private schools? It really doesn't matter—provided you're saving enough each year for retirement and other goals, says Adam Grossman.
Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Future Shock, Scary Stuff and Irksome Adversaries.
Most of the time, this is a good thing. If we carefully pondered the assumptions behind every judgment we make, life would become painfully unproductive. Still, it’s helpful occasionally to question whether we’re misjudging the world, especially when it comes to major issues, financial and otherwise. Examples? Here are 35 assumptions we shouldn’t make:
That people who are richer are happier.
That a fund’s past performance will repeat.
That other points of view are without merit.
That endless relaxation is what we really want.
That stock market investors—in aggregate—care greatly about anything other than interest rates and future corporate earnings.
That our future self won’t regret the money we’re merrily spending today.
That great companies will be great stocks.
That an insurance agent is selling us the best investment products for our financial future.
That an item on sale is a bargain.
That our immediate reaction is the right one.
That sophisticated investment products and strategies deliver better returns.
That paying less in taxes is always financially smart.
That silence means someone agrees with us.
That the collective judgment of investors, as reflected in market prices, is wrong.
That people who claim to beat the market actually have.
That we’ll have the same high tolerance for risk when share prices are 30% lower.
That we’re being rational.
That investment experts pontificating on TV have any clue what will happen next in the economy and the financial markets.
That friends and family are telling us the unvarnished truth.
That material progress—the bigger house, the faster car, the next pay raise—will deliver lasting happiness.
That a fee-only financial advisor has no conflicts of interest.
That financial reporters fully understand what they’re talking or writing about.
That how we think we’re perceived is how we’re perceived.
That those who are most insistent or passionate are most likely to be correct.
That extraordinary career and investment success is all about talent and hard work—and that luck plays no role.
That last year’s insurance coverage still fits our circumstances today.
That high investment costs are an indication we’re getting something special.
That our home will be a great investment.
That we instinctively know what will make us happy.
That our life in the years ahead will be similar to today.
That we know something other investors don’t.
That people who appear wealthy actually are wealthy.
That our recollection is correct.
That our thinking isn’t swayed by the investment mob’s euphoria and despair.
That, when the job is finally done, we’ll feel a lasting sense of triumph.
Latest Articles
HERE ARE THE SIX other articles published by HumbleDollar this week:
"The sunk cost trap is everywhere because we’re taught that successful people never give up, but instead always move forward," writes Jim Wasserman. "Unfortunately, this can also lead to prolonged failure."
In the late 1990s, Andrew Forsythe wanted to invest part of his portfolio in individual stocks. His strategy: only buy stocks recommended by multiple experts. Result? It wasn't good.
"We may not be done with our simplifying," says Brian White. "When I get tired of managing our investments, I’ll just move all our money into a Vanguard target-date fund or one of the firm’s target-risk funds."
Confused about the Social Security earnings test and about how benefits are taxed? Richard Connor offers a refresher course on both topics.
"Your real benchmark isn’t beating the stock market," argues Robin Powell. "Instead, it’s how you’re performing relative to the goals that you’ve set."
Worried about how much you spend on, say, vacations or private schools? It really doesn't matter—provided you're saving enough each year for retirement and other goals, says Adam Grossman.
Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Future Shock, Scary Stuff and Irksome Adversaries.The post Never Assume appeared first on HumbleDollar.
