Jonathan Clements's Blog, page 327

Taking the Hit

ONE OF MY GOALS for 2020: develop a plan for doing Roth IRA conversions over the next 10 years. Once the money is out of traditional IRAs and in a Roth, it’ll grow tax-free. Problem is, the conversion means taking a tax hit today.

So why am I interested? There are several reasons: lowering lifetime taxes for my wife and me, creating the flexibility to manage future tax bills and leaving a tax-free inheritance to our children. On top of that, today’s depressed stock prices offer a great opportunity to convert shares at a lower tax cost.

My wife and I are both age 62. Last year’s SECURE Act raised the starting age for required minimum distributions (RMDs) from retirement accounts from 70½ to 72. That gives us 10 years to make Roth conversions before we’ll have the enforced—and potentially large—annual tax bills triggered by RMDs.

The decision to convert isn’t a simple one. At its core, it’s a choice between paying taxes today and paying them later. But there are also other significant issues that come into play. Here are seven factors to consider:

1. Whither taxes? As you decide whether to convert, this is the key issue. Would you pay taxes at a lower rate today, if you opt to convert money to a Roth, or would your tax rate be lower later on, assuming you left your traditional IRA untouched and instead simply took distributions some years down the road?

We can’t, alas, predict the future, but we can look to current tax laws. When the Tax Cuts and Jobs Act was enacted in 2017, it reduced marginal tax rates and widened tax brackets. These changes will sunset after 2025 unless Congress passes new legislation.

Reverting to pre-2018 marginal tax rates in 2026 would most likely move my wife and me from the 24% marginal tax bracket to 28%. In fact, many commentators believe that our ballooning government spending will lead to even higher tax rates. I have no idea what will happen, but I strongly suspect future tax rates won’t be any lower than they are today.

2. Paying Uncle Sam. If you convert, you’ll owe income taxes on the sum involved. Conventional wisdom says you should try to avoid paying that tax bill by dipping into your retirement account, because that’ll mean even more taxable income on top of the taxable income generated by the Roth conversion. Instead, you should—ideally—have other money set aside to cover the conversion tax.

3. Today’s bear market. It may seem counterintuitive, but falling share prices offer the opportunity to do a Roth conversion at a lower tax bill. How so? It helps to think in shares instead of dollars. Say you own 1,000 shares of a stock or fund in a traditional IRA. The shares had recently been at $10 but are now at just $5. If you convert the shares to a Roth, you would still have 1,000 shares, but you’d owe taxes on $5,000 of additional income, rather than $10,000.

An added incentive: Roth IRAs have the potential to enjoy a longer stretch of investment growth. Unlike traditional IRAs, Roth IRAs aren’t subject to RMDs once you reach age 72. Instead, the entire account can be left to grow tax-free.

4. Helping your heirs. Roth IRAs are inherited tax-free by the beneficiaries you name. Your spouse can treat the inherited Roth as his or her own, which means there are no RMDs. Meanwhile, non-spouse beneficiaries typically have to empty the account within 10 years. You might advise your heirs to wait until the 10th year to pull money from your Roth, so they get maximum benefit from the tax-free growth.

5. No re-dos. Prior to 2018, you had the ability to undo a Roth IRA conversion up until Oct. 15 of the year after the conversion was made. This “recharacterization” option was eliminated by 2017’s tax law. The upshot: When you convert, you need to be 100% certain you want to do it—because there’s no going back.

6. No early exits. Roth IRAs are subject to the so-called five-year rule, which means you could face income taxes and possibly tax penalties if you tap your new Roth before the five years are up. In other words, if you aren’t sure you can leave your Roth untouched for five years, a conversion isn’t a good idea—and that’s doubly true if you’re under age 59½.

7. Getting it done. There are three ways to execute a Roth conversion:

A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days.
A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution.
A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution.

Our traditional and Roth IRAs are at Vanguard Group, so I used its online system to do a same-trustee transfer. It was very easy: Within a day, the shares had been transferred from my traditional IRA to my Roth.

I’m a semi-retired engineering consultant, so my income fluctuates a lot from year to year. My plan: Look at our total income each quarter to assess our projected tax bill and see if we want to do a small conversion. That way, I can move at least some money into a Roth earlier in the year—and potentially enjoy more tax-free growth—while avoiding an overly large conversion that pushes us into a much higher tax bracket.

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 Buyer Take Care, Numbers Game and Should You Sell . Follow Rick on Twitter  @RConnor609 .

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Don’t Count on Me

I DON’T THINK I can do it. I know it’s the patriotic thing to do—support our local businesses. But I don’t see myself visiting local restaurants, movie theaters or department stores for a quite a while.

After they lift the stay-at-home order, I’m not rushing out to my favorite restaurant and ordering a grilled chicken avocado wrap with a kale salad. I don’t care if the waiter is wearing a protective mask and gloves, and if I’m sitting six feet away from the next table. It’s going to take some time before I feel comfortable being around strangers in a social setting.

I know some people think the economy is going to take off when the current safety measures are lifted, but I have my doubts about a V-shaped recovery. I believe there are too many people like me who will err on the side of caution—and simply aren’t ready to visit the gym, book a flight or sit down at their favorite bar.

A recent Associated Press poll found an overwhelming majority of Americans favor stay-at-home orders as an important way to combat the coronavirus outbreak. Moreover, many individuals will be reluctant to spend money because of the economic hardship they’ve endured during the shutdown—and especially so when U.S. household debt is at a record $14 trillion.

With Americans reluctant to spend, the economy may have a hard time bouncing back. According to the Federal Reserve Bank of St. Louis, consumer spending accounts for almost  70% of economic growth. The key to an economic rebound is getting consumers to a place where they feel comfortable spending again. If businesses focus on the health and safety of their customers, that’ll help somewhat. Having a vaccine to combat the virus would, of course, do the trick, but the earliest that’ll happen is next year.

In the meantime, everybody has an opinion about how and when we should proceed in reopening the economy. But they fail to realize that the ultimate decision is going to be made by the consumer—you and me. Right now, I’m not ready to visit any nonessential businesses.

I’m not just thinking about myself. I’m also thinking about my significant other, about the doctors, nurses and other health care providers who risk their lives every day to protect us, and about all the essential retail employees, whose jobs have been turned into a high-risk profession by the pandemic. I don’t want to risk their health by risking mine.

When my state meets public health officials’ criteria for reopening the economy, that’s when I’ll take some baby steps and start tackling some of the items on my to-do list. What’s on my list?

I need to get my teeth cleaned. I missed my last appointment because my dentist closed his office during the pandemic. He’s currently only seeing patients who need immediate attention.
I need to have my annual physical. My doctor recommended I delay until the safety restrictions are lifted.
I need to get my eyes examined.
I need to get my car serviced. It’s time for an oil change.
I need to start fixing up my house. Making the necessary repairs would make it easier to abide by the next stay-at-home order, should the coronavirus return later this year.

Yes, that’s it. What about my wish list of nonessential activities? Those things will have to wait until there’s a vaccine, an effective treatment or the coronavirus somehow disappears.

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 Don’t Go It Alone, Lost and Found and Keeping My Balance. Follow Dennis on Twitter @DMFrie.

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Less Is More

THE COVID-19 pandemic has made the past two months feel like a cruel rollercoaster ride, with sharp drops in the stock market, businesses closing and millions displaced from their jobs. The overall mood has been unsettling, to say the least.

Want a little more financial certainty? There are steps we can take that’ll give us greater control over our life, both in the short and long term. For me, I’ve gained comfort from revisiting my living expenses. This exercise can have great benefits, especially with COVID-19 threatening our jobs and our finances.

For instance, cutting living costs can help us pay for unexpected expenses that we hadn’t budgeted for, like those 300 rolls of toilet paper. It also allows us to further shore up our emergency fund, which could be particularly helpful if we get laid off.

The longer-term benefits of being deliberate with our spending are even more striking. Consider the hypothetical situation of two people—we’ll call them John and Mark—which is summarized below:

As you’ll see from the table, both John and Mark make a gross salary of $150,000 and take home $100,000 after taxes. But John has living expenses of $95,000 a year, while Mark lives on $60,000. Thanks to his far lower living expenses, Mark has three key financial advantages over John:

1. Save more. Because John spends most of his income, after a year of working, he hasn’t even saved a month of living expenses, while Mark has socked away eight months of living costs.

2. Need less in future. Because John’s expenses are higher, he needs a bigger emergency fund ($23,750 vs. $15,000) and a larger retirement nest egg ($2.375 million vs. $1.5 million). It takes John nearly five years to build up a rainy-day fund equal to three months of living expenses, while it takes Mark just 4½ months.

3. Greater career flexibility. Because his expenses are so high, John is pretty much locked into his current job or a position that’ll pay a similar salary. Meanwhile, if Mark received a job offer at a salary of $100,000—which would be a one-third cut in pay—he could still accept the position, because his living expenses are far lower. Having that sort of flexibility could be particularly important in today’s challenging job market.

What does all this mean for you and me? My advice: Review your expenses for the past several months and categorize each expense as need-to-have or nice-to-have. You might temporarily decrease those nice-to-have expenses, so you can shore up your cash reserves. The good news is, because of social distancing and sheltering in place, you may have cut some expenses already, including dining out, going to the movies, getting haircuts and traveling.

What else might you cut? Here are some possibilities, ranging in impact from small to large:

Cut bank fees (e.g. ATM, foreign transaction and late payment fees).
Cancel unused subscriptions.
Combine individual streaming subscriptions into a cheaper family plan (e.g. Spotify, YouTube TV).
Negotiate your phone, internet and cable bills.
Call your auto insurer and ask for a premium reduction.
Negotiate your rent.
Refinance your mortgage.
Reduce the burden of high-cost debt by requesting a lower interest rate or paying it off with lower-cost home equity borrowing.

I admit it, I’m a finance nerd. Still, I really do think that periodically reviewing expenses can be an empowering experience. First, there are the obvious benefits: You immediately gain more control over your finances, expand your career flexibility and perhaps achieve greater peace of mind. But this process might also help you clarify your life choices.

I believe that difficult times can help us grow—if we engage in some hard work and self-reflection along the way. I’ve found that revisiting my living expenses has encouraged me to reexamine my past decisions and define my future goals for a happier, more value-driven life. During this challenging period, that’s what I’d call a silver lining. And let’s face it: We all have a little more free time than we want these days for some good old-fashioned arithmetic.

Roger Ma is a financial planner at  lifelaidout , a publisher strategist at Google and author of  Work Your Money, Not Your Life . The above article is drawn from his book. Roger lives in New York City with his wife Jenn, son Owen and their two cats. Follow him on Twitter @lifelaidout .

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Riding It Out

IN MID-MARCH, I went into lockdown with optimistic thoughts. Perhaps it would give me time to perfect my Spanish, master classical guitar, write more blog posts, start online courses and even begin the book that Jim and I often discuss writing together.

I’ve accomplished none of my grand plans. Instead, I’ve been consumed by reading COVID-19 news. I’ve slept poorly and eaten too much. I remain perpetually exhausted. I struggle to focus and lack creativity. Everything takes twice as long as usual. My sense of time and motivation has completely gone out the window.

Before I retired in 2018 and we moved to Spain, I worked from home for seven years, so I’m no stranger to spending most of my time in the house. But it’s harder to stay home when you’re retired, without the need to make day-to-day work decisions and interact with colleagues.

I’m trying hard not to feel guilty about my mood or lack of accomplishments. Apparently, all this is normal. My feelings of grief are, it turns out, part of a greater collective grief.

There have been countless articles about coping with the recent stock market downturn and about how to keep ourselves entertained at home. But very few cover the mental health aspects of today’s stay-at-home orders. The months ahead will be rough on everybody. What to do? Here’s how Jim and I are trying to sustain ourselves through these hard times:

1. Acknowledge loss and grief. According to David Kessler, an expert on grief, understanding the stages of grief is a key place to start. The stages aren’t linear and may not happen in the same order. Jim and I have discussed our emotional responses. As I write this, I flip between sadness and acceptance, while Jim is alternating between anger and acceptance. There is power in recognizing grief and in reaching acceptance. I can stay home to save lives. I can connect with my family and friends virtually.

2. Lower expectations. One thing I’ve realized is that, even though my calendar looks more open, I don’t have the ability right now to take on new tasks and new goals. For me, simply taking care of myself takes a lot of mental energy. All grand plans will still be there when it’s the right time to tackle them.

3. Limit time spent reading the news. I’ve found this has helped me to sleep better. I no longer check the headlines multiple times each day. Instead, I use my time to read more books and cook new recipes.

4. Routine, routine, routine. I found that setting a regular time to wake up, exercise, relax and go to bed has helped me to feel more in control.

5. Exercise. There’s plenty of research on exercise and its positive effect on mental health. It reduces anxiety and depression. For us in Spain, because even outdoor individual sports aren’t allowed, we have to be more creative if we’re going to stay active. We use our terrace for exercise. For 30 minutes, we jog back and forth, jump rope, and hit a tennis ball against the wall or together volley it back and forth.

6. Get sunlight daily. I find it improves my mood. I often sit in the sun on the terrace, either to read a book or have a conversation over our shared wall with our neighbor—an elderly woman living alone.  For some of our friends who don’t have an outdoor space, they have lunch or read by an open window.

7. Stay connected virtually. We watched a movie with our son, who lives in Japan. We’re also investigating how we might work out together or play games virtually with both of our sons.

8. Look for small victories and opportunities. Even though we’ve lost so much, I’m grateful to have a partner like Jim and the companionship of our cats. Together, we’ve even taken to replicating famous works of art—both paintings and sculptures.

Jiab Wasserman’s previous articles include Enforcing the Rule, When You’re No. 2 and Grab the Wheel .  Jiab and her husband Jim, who also writes for HumbleDollar, currently live in Granada, Spain. They blog about downshifting, personal finance and other aspects of retirement—as well as about their experience relocating to another country—at  YourThirdLife.com .

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Happy Days

RETIREMENT is being rethought: Playing lots of tennis, golf or bridge, while living modestly so we don’t run out of money, might have been an acceptable plan when lives were shorter.

Now, the early go-go years of life’s “fourth quarter” can last two decades, especially if we retire early. A life of pure leisure may not be financially possible—and it might even be a bad idea mentally, emotionally and physically. As we look beyond the current uncertainty of the coronavirus, we should prepare for what’s likely to be a longer and healthier retirement than previous generations enjoyed.

Let’s say you’re fairly confident you have the money needed to support yourself for the rest of your life, so work is now optional. Without a sense of purpose and a thoughtful plan, you may be more susceptible to bad decisions, including financial, marital and health mistakes. To help you avoid key pitfalls, here are five pointers.

Tip No. 1: Consider a part-time job, becoming a consultant or taking a volunteer position. This could help you feel useful and might be a good option for meeting people.

Currently stuck at home? Use this time to figure out your game plan. The coronavirus has reinforced the value of strong connections with others—preferably those with positive but realistic attitudes.

As you ponder working part-time in retirement, you’ll likely be able to leverage your current career. For example, attorneys or accountants might do some consulting. A retired executive could coach professionals on their way up or mentor local small business owners through an arrangement with the community college. A former chef might begin a blog or podcast that focuses on food and wine. If you’ve always loved history or art, you could work as a guide at a museum or historical site.

Tip No. 2: Guard and cultivate your mind. In our contentious 24/7 media environment, we need friends and activities to help us stay balanced. But it’s also important to minimize time spent with negative people and to refrain from dwelling on the world’s problems.

Here’s a real-world example: A client of mine was having heart problems. His cardiologist helped him discover that part of his problem was attending a weekly men’s group that spent time fretting over the world’s dysfunction, compounded by watching too much cable news. For 30 days, he stopped attending the men’s group and gave up certain news shows, choosing instead to spend time with his most positive, can-do friends. He is now off his doctor’s heart attack danger list and off most of his medications. During the current pandemic, he’s selectively calling and Zooming with those people in his men’s group who energize him with their upbeat attitudes.

A great way to focus on the positive side of life is to work on your emotional quotient or EQ. EQ is the measure of a person’s adequacy in such areas as self-awareness, empathy and dealing sensitively with others. Studies have shown that EQ is a better predictor of career success than IQ, or intelligence quotient. Better EQ skills can help us build a stronger network of friends during retirement.

A healthy sense of curiosity also helps build friendships and enhances mental health. For instance, read something new and different every day. Learn a new language. Dig into a historical documentary or take a course at the local library or community college. Be both interested and interesting. Challenge yourself.

Tip No. 3: Nurture existing friendships. Early in retirement, we need close friends who can help us feel useful and important at a time when we might feel the loss of our career identity. The importance of friends, especially “share almost anything” friends, was a key finding in our research with aging thought leaders and hundreds of people approaching—or already in—their fourth quarter.

Loneliness has become an epidemic. Most people don’t realize how important it is to keep up with old friends.

Tip No. 4: Find new friends. Amid the coronavirus shutdown, this is difficult, but it’ll be easier once life returns to normal. For instance, simply going to the gym can connect you to new people. Don’t just hang out with the Silver Sneakers group. Try to engage with younger people, especially if you don’t have many in your current circle of family and friends.

Some of our clients use old school networking, participating in church and community events. Others have used Meetup.com to find people who share their interests. Volunteering is a great way to meet people. Find a group whose mission you really believe in and see how you can help.

What happens if you don’t tend to your existing “garden of friends,” while also seeking to add new friends? There’s a risk that, in life’s fourth quarter, you could become overly dependent on your spouse or life partner.

Tip No. 5: Find the right balance with your spouse. There’s a reason the old saying “I married you for better or worse, but not for lunch” rings true. In the past, when lifespans were shorter and the slow-go years quickly became no-go, an overly needy spouse was a problem, but not usually fatal to the less needy spouse or the marriage.

With longer go-go and slow-go periods, neediness can be toxic for both partners and sometimes leads to gray divorce, which is fast growing and a major threat to maintaining financial independence. One of my partners and I presented our thoughts on gray divorce—and how to avoid it—at a 2018 conference. Click here to view the presentation.

Dennis Stearns is a Certified Financial Planner, a partner at Stearns Financial Group and the author of Fourth Quarter Fumbles: How Successful People Can Avoid Critical Mistakes Later in Life. For more information, visit FourthQuarterFumbles.com. Consider taking the free Fumbleocity test.

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Defending Yourself

I JUST CAME ACROSS a magazine article from the B.C. era—before coronavirus. The article, which appeared in a popular personal finance magazine, described a certain type of bond investment. The writeup was well researched and balanced, including a discussion of various risks.

In fact, the author raised the possibility of an economic downturn. How did he assess that prospect? “Recession, as always, is a risk,” he wrote, “but where’s the recession? Not seeing it, friends.”

That was in February. I can’t blame the author for so easily dismissing the risk of recession. Anyone would have done the same thing. After all, unemployment was at a 50-year low as recently as two months ago. But since then, everything has changed. In the past five weeks, 26 million Americans have filed for unemployment benefits.

While no one could have seen this coming, it raises an important question: If our financial circumstances can change so dramatically, so quickly and so unpredictably, how can any of us make plans for the future? To put it more bluntly, what’s the point of planning if an extreme event like today’s pandemic can upend things at any time?

Unnerving as this period has been, and as unpredictable as the future is, here are three areas where I think planning can be worthwhile:

1. Contingency planning. Suppose you walked into the Pentagon. I imagine sitting on some shelf is a contingency plan for every conceivable type of military threat. Yet no one, not even with the resources of the Pentagon, can conceive of every possible risk. Every time things go awry, it’s a little different.

Nevertheless, it’s still worth planning. Yes, each risk is different, but they all fit into a set of categories that you can conceive of. Coming back to personal finance, these categories include:

A disruption to your income
A decline in the value of your investments
Unexpected expenses
Death or disability

Are there other risks? Certainly. Still, most financial problems fit into one of the above four categories, and that’s good news. I can’t think of any financial commentator—myself included—who predicted our current mess. But you didn’t need to. Instead, the heart of financial planning is simply to think through each of the four risk categories and to have a contingency plan for each.

Does this mean that you’ll be able to weather every possible storm? No, it would be naive to assume that. Indeed, no amount of planning would have made today’s situation easy. Still, I see value in thinking about contingency plans—so you know, in advance, which levers you could pull in case of emergency.

2. Diversification. If you look back over the past 10 years, one of the most successful investments would have been the Nasdaq 100 Index of growth stocks—Amazon, Apple, Alphabet and their peers. But if you had owned that index over the prior 10 years—from 2000 to 2010—you would have lost money, and a lot of it. Similarly, if you had kept your money in bonds in recent years, you would have lagged behind stocks. But this year, it’s the opposite. Most bonds are doing great.

This is the unfortunate reality of diversification. There’s no way to be above average all the time. But as you think about ways to protect yourself from the unknown, diversification may be your most powerful defense. And remember that spreading your investment bets is just one form of diversification. There are many others. When things begin to return to normal—hopefully soon—I think it’s worth spending time brainstorming about other ways to diversify your financial life.

3. Insurance. Physician-blogger Jim Dahle has a book called Financial Boot Camp in which he addresses the most important topics in personal finance—everything from budgeting to student loans to investments. But where does he start? The very first chapter is about disability insurance. And chapter 2? Life insurance.

In Dahle’s view—and I agree with him entirely—these are the most important things. If your assets aren’t yet at the level where you can self-insure, this should be the first thing you look into on Monday morning. You can’t foresee every type of crisis. But it doesn’t take much to figure out how much disability and life insurance would be sufficient in a worst-case scenario.

Adam M. Grossman’s previous articles include As If, Look Around and Under Pressure . Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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Take It Away

INVESTING IS A GAME of subtraction—and I’m not talking about this year’s stock market decline.

Wall Street sells the fantasy of market-beating returns, using it to seduce investors into adding new stocks and funds to their holdings. Result? Performance-chasing investors cobble together badly diversified portfolios that they imagine will beat the market, while overlooking the hefty costs that Wall Street charges. This is a strategy that’s almost guaranteed to make heaps of money—for brokerage firms and money managers.

Want to line your own pockets, instead of Wall Street’s? Forget addition and instead think subtraction. What do I mean by that? As you design your portfolio, try this two-step process:

Step No. 1: Subtracting investments. Start with the global market portfolio, which includes all stocks, bonds and other assets that are readily tradeable. This is the mix of investments that’s owned by all investors worldwide and reflects our collective judgment of what different securities are worth. What does the global market portfolio look like?

Phil DeMuth, a financial advisor and author, says you can replicate it with five exchange-traded index funds: 40% Vanguard Total World Stock ETF (symbol: VT), 21% Vanguard Total Bond Market ETF (BND), 33% Vanguard Total International Bond ETF (BNDX), 5% iShares Global REIT ETF (REET) and 1% Invesco DB Commodity Index Tracking Fund (DBC). The Vanguard Total World Stock ETF currently has 57% in U.S. stocks and 43% in international markets.

Taken together, these funds pretty much reflect the investments that we all own in the percentages that we own them, so arguably it’s the ultimate “neutral” investment mix and hence should be our starting point in designing a portfolio. If we stray from this mix, we’re effectively ignoring the collective wisdom of all investors and making a market bet. My contention: We should stray only if we have a compelling reason.

And, no, our hunch about which investments will perform best in the months ahead doesn’t count as a compelling reason. In fact, I believe we should deviate only for reasons of risk.

For instance, we might keep more or less in stocks depending on our time horizon, job security and stomach for market turbulence. Similarly, we may want to reduce our exposure to currency swings, because we’ll end up spending much of our nest egg on U.S. goods and services. That might lead us to keep less in foreign bonds.

Should we also keep less in foreign stocks? As I’ve noted before, many U.S. investors seem to believe U.S. stocks are both higher returning and lower risk. If true, this would violate perhaps the most fundamental rule of finance—that risk and expected return are inextricably linked. Still, if investors perceive foreign stocks to be riskier and they’ll be more tenacious investors if they have less in foreign markets, overweighting U.S. stocks probably isn’t too grave an investment sin.

Of course, most investors deviate even further from the global market portfolio, banking heavily on, say, blue-chip U.S. companies or perhaps just a handful of technology stocks. This may work out fine—but it sure isn’t guaranteed.

These folks are sacrificing diversification, which is one of the long-term investor’s greatest allies. Nobody knows which stocks, industries or even countries will prosper in the years ahead—and those who own narrowly focused portfolios could find themselves on the losing side of market history. That history tells us that a globally diversified portfolio has always recovered from bear markets and marched onward to new highs. What about more narrowly focused portfolios? History isn’t nearly so reassuring.

Step No. 2: Limiting costs. As we deviate from the global market portfolio, we don’t just increase the risk of rotten results. We also tend to drive up investment costs. Those increased expenses subtract from our investment returns—and further boost the odds of poor performance.

Suppose we skip total market index funds, and instead opt for funds that have a narrower focus or that are actively managed. The result is typically higher annual expenses and heftier trading costs, both of which will drag down performance.

In addition, more narrowly focused investment bets often generate large annual tax bills. Among investment costs, that’s potentially the biggest subtraction of all. Actively managed funds and sector funds trade their portfolios more than total market index funds, resulting in larger annual capital-gains distributions. Shareholders then have to pay taxes on those distributions, assuming they hold these funds in a taxable account.

Even if shareholders own investments that are reasonably tax-efficient, there’s a risk they’ll inflict tax bills on themselves. Suppose an actively managed fund or a sector fund lags behind the broad market averages. Disappointed investors will often bail out.

That’ll trigger a tax bill if they hold the fund in a taxable account and they have any sort of gain on their holdings. By contrast, unless something goes badly awry, owners of total market index funds shouldn’t ever feel compelled to sell because of market-lagging performance—plus these funds should prove to be highly tax-efficient.

What I would subtract. We should all strive to build portfolios in which we have great conviction, so we have the tenacity to stick with our holdings during rough markets. We can’t be sure any particular actively managed fund, sector fund or individual stock will bounce back from 2020’s market drubbing. But we can be fully confident that total market index funds will recover along with the broad market.

Total market funds are also less nerve-racking to own, because we don’t see all the carnage suffered by individual stocks and market sectors. Instead, all we see is a single share price that will move more sedately than most of the securities held within the fund.

That brings me back to Phil DeMuth’s five-fund portfolio. I’d toss out the real estate and commodity funds. They’re modest positions that won’t contribute much to the portfolio, and yet they increase the risk of bad investor behavior by adding complexity and extra worry. On top of that, the Invesco commodity fund—at 0.89% in annual expenses—is way too costly for my taste.

I’d also eliminate the international bonds. That would remove some of the currency risk from a portfolio destined to pay for retirement expenses, college tuition bills and other costs denominated in U.S. dollars.

Where does that leave us? We would own just a total world stock fund and a total U.S. bond market fund—an elegant two index-fund portfolio. My own investment mix is more complicated than that. My suspicion: If I sold everything I owned and bought these two funds, my portfolio’s performance in the years ahead would be just as good—and perhaps even better.

Latest Articles

HERE ARE THE SEVEN other articles published by HumbleDollar over the past week:

In response to COVID-19, the federal government is offering a slew of financial goodies. What’s in it for you? Peter Mallouk spies nine intriguing opportunities.
“For stock market investors, drawdowns of 50% or more come with the territory,” writes Mike Zaccardi. “What doesn’t come with the territory: good investor behavior.”
Catherine Horiuchi thought she and her late husband had done a fine job of planning their estate. But they overlooked one account—and it triggered a costly legal bill.
“Maybe something good will come out of the coronavirus and we’ll learn a valuable lesson—about the dangers of social isolation and the loneliness that the elderly face,” says Dennis Friedman.
Every trading day, the financial media explain why stocks are up or down. But there’s never a single reason—and believing so is often a recipe for bad investment results, warns Adam Grossman.
“Spending has always been an important topic in personal finance,” notes Rick Connor. “But amid today’s pandemic, spending has become a moral question as well.”
No, COVID-19 hasn’t brought out the best in everybody. Peter Mallouk details six coronavirus-related scams.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Back to Basics, Growing Conviction and Facts of Life.

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The post Take It Away appeared first on HumbleDollar.

Don’t Fall for It

IN EVERY CRISIS, good people do great things and bad people, well, they do some really, really bad things. This article is about protecting yourself from the bad people. Never in my career have I seen so many scams in motion all at once.

Crooks tend to step up their game at times of crisis: Stress, change and misinformation make for the perfect backdrop, as they try to separate you from your money. Here’s a rundown of six current scams, and how to spot and avoid them. Note that nearly all of them are simply tailored versions of scams that take place year-round.

Scam No. 1: “I need your help right now but can’t talk to you on the phone.”

Recently, I received an email from a business colleague asking if I could reach out to him. I emailed back setting a time that I’d be available to talk. I then received back the following message:

“I have a virtual call being set up at 1 p.m. I am leading a committee ensuring the procurement of test kits, masks and ventilators to support hard-hit cities and other countries. I have just got off the phone with a vendor in Kansas, hence my reaching out to you. Here is the thing: Peter, we are looking to remit funds to said vendor to cover the balance for these materials and it is past due. For this reason, I thought I would run it by you and see if you could have your bank wire to the company on our behalf. We will reimburse you the sum on or before Thursday. Is this something you can do for us as a show of support? It would be greatly appreciated. Kindly write back and let me know.”

Total scam. Never, ever send funds to anyone based on an email. Always talk to the person first. There are many versions of this scam, from asking for money to asking you to purchase gift cards on their behalf. All have three things in common:

The messages will come from people you know who have had their email hacked, or appear to come from someone you know but, in fact, come from someone using a slightly altered email address.
They will have a sense of urgency.
The sender won’t be available to talk to you.

How do you spot these scams? First, look for typos, strange spacing and wording that doesn’t sound like it comes from the sender. Second, check the email address. Often it will look very similar to the address of someone you know, but with maybe one letter changed. Third, always call the sender. If the person can’t talk, don’t send anything.

Tip: If someone asks in an email for a donation in cash, gift card or wire transfer, don’t do it without verification.

Scam No. 2: The text message from a governmental agency.

The Department of Justice is warning that a version of this scam is currently running rampant. In an example of this rip-off, scammers email or text you a link to take a coronavirus preparedness test that appears as if it were sent by the Department of Health and Human Services. Similar scams have been reported with fake links from organizations such as the Centers for Disease Control and the World Health Organization. These links instead contain a computer virus that can take over your computer or leave the predator to lie in wait to try to pull a scam on you later.

Know that no government agency is going to email or text you a link to get information. Typical scams similar to this that operate year-round involve emails or calls from the IRS or the Social Security Administration. Fully 100% of the time, the answer is to delete the message.

Tip: Never click on email or text links from sources you don’t know.

Scam No. 3: The fake charity.

Get ready for calls from the “COVID-19 Give Back Fund” and the “Combating Coronavirus Fund.” Scammers are creating fake charities to take advantage of everyone’s desire to help. If you haven’t heard of the charity before, don’t know anyone affiliated with it and can’t confirm it’s reputable, don’t give. There are plenty of ways to give that are easy to validate.

Tip: Do your homework when it comes to donations, whether through charities or crowdfunding websites. Don’t let anyone rush you into making a donation.

Scam No. 4: Money for medical treatment.

People are receiving calls from scammers posing as health care providers who have recently treated a loved one for COVID-19—and are now demanding payment. Just hang up. No one is going to call you for payment.

Tip: A legitimate medical provider would never ask a patient’s friend or relative for payment via a phone call.

Scam No. 5: Fees to access stimulus and CARES Act benefits.

With this scam, someone calls or emails you offering you benefits under one of the government’s new programs. The catch? They need you to send them some funds in advance for “filing fees” or other costs. In another version of this scam, crooks will ask you to click on a link (here we go again) to access benefits. In the most sophisticated version of the scam, crooks posing as representatives of a governmental agency will ask for your bank information, so they can transfer your stimulus check to you.

Tip: Never respond to anything like this or click any links. And never, ever provide anyone your banking information without verifying with a phone call that you know the source.

Scam No. 6: Social Security fraud.

Social Security scams happen year-round. Now is no different. On March 27, the Social Security Administration issued a warning about fraudulent letters threatening suspension of Social Security benefits due to COVID-19 or coronavirus-related closure of Social Security offices.

Social Security beneficiaries have received letters through the mail stating their payments will be suspended or discontinued unless they call the phone number referenced in the letter. The agency said scammers may then mislead beneficiaries into providing personal information or payment via retail gift cards, wire transfers, internet currency or by mailing cash. The scammers will claim this is required to maintain regular benefit payments during this period of COVID-19 office closures.

Tip: No one from the government will ever ask you for your banking information or credit card information, and they certainly won’t ask for gift cards or payment via bitcoin.

Peter Mallouk is president and chief investment officer of Creative Planning in Overland Park, Kansas. His previous articles were Thank Uncle Sam and An Ill Wind. Peter and HumbleDollar’s editor, Jonathan Clements, together host a monthly podcast. Follow Peter on Twitter @PeterMallouk.

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The post Don’t Fall for It appeared first on HumbleDollar.

Missing a Step

I LIKE TO THINK my husband and I were savvy and careful when planning our estate. Yet anybody can make an occasional dumb mistake. That brings me to my next surprise in settling my husband’s affairs—and it came with an unfortunate legal bill.

As a couple, we’d established a revocable living trust at a young age, when death was a strictly theoretical idea. The trust eliminated the need for our estate to go through probate, not that I knew what that was at the time.

Ten years later, as it dawned on us that we had edged closer to the end of life, we reviewed our trust for changes in the law and in our finances. This process included updating financial accounts, so they’d roll into the trust, either immediately or on our deaths.

We’d decided on a trust based on our personal situation. Not everyone needs one. Shady characters try to sell them to people who don’t. Still, even if you don’t need a revocable living trust, you do need to ensure your house, retirement accounts and other assets are inherited according to your wishes. The process of establishing the beneficiaries for a financial account is typically simple.

After reviewing our trust, we dutifully mailed request letters to retitle accounts, so they’d be included in the trust. Some institutions immediately updated our accounts, while others responded with their own forms that needed to be signed and notarized, and then returned. Well, we were busy. With kids and work and life, those forms sat unattended, along with other important but not urgent paperwork.

After my husband died, I found these forms. Luckily, most accounts had been retitled and had named beneficiaries. But one personal account had no beneficiary named. Our legal work to ease the management of our estate was clouded by this one oversight.

Once again, I appreciated the value of working with our attorney, a calm, knowledgeable professional by training and practice. While I fretted, he got busy with the work of going to court to have this account added to the trust. The expense and delay could have been avoided had we followed through at the beginning.

What did I learn from settling my husband’s estate? Here are three takeaways:

You don’t necessarily need a trust to have a simplified process for transferring your estate’s assets. But you will need to make sure you name beneficiaries for all your retirement accounts, you own cars and real estate jointly with right of survivorship, and you set up regular taxable accounts so they transfer on death to your intended heirs.
Each state has its own process for handling the transfer of property after death. This includes case law to cover the inevitable snafus resulting from ordinary people either not planning or making mistakes in their planning. Possibly you’ll need legal assistance. State courts have web pages to help you, such as the one we have here in California.
As an estate’s executor or trustee, you carry out the known and written wishes of the deceased. This is not a time to settle scores with wayward relations or tamper with the deceased’s intentions, even if the situation gives you some power and latitude to do so. Oversights, slights or delays in settling an estate can sour family relations—permanently.

Catherine Horiuchi recently retired from the University of San Francisco’s School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. This is the fifth article in a series. Catherine’s four earlier articles were At the End, The Aftermath, When It Rains and Muddling Through.

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Don’t Go It Alone

IT’S 4:45 A.M. and another day quarantined at home. Even though I have nowhere to go, I still get up early. It’s one of my favorite times of the day. This is when I go downstairs to the kitchen, make myself a cup of tea, toast some raisin bread and read about what’s happening in the world.

Later, Rachel and I will go for a walk and then have breakfast together. This is how we now lead our lives—sequestered in the house—away from friends and family. It’s made up of insignificant daily activities: cooking, cleaning, reading and exercising.

I’m not complaining. I’m grateful that I have someone, like Rachel, to help me get through these trying times. Having her by my side makes the mundane actives more enjoyable. I enjoy cooking together. Such activities no longer feel like work. Maybe they’re right about married people living longer than those who are single.

I think about all the elderly people who live alone, without a friend or loved one to share their day. For most of them, they have a life much worse than mine. They’re separated from the things we take for granted.

When I think about my new life today, I think about my elderly mother. I now have a better understanding for how she must have felt, spending time alone in her house, not able to go anywhere, waiting for me, my sister or a friend to visit.

Maybe something good will come out of the coronavirus and we’ll learn a valuable lesson—about the dangers of social isolation and the loneliness that the elderly face. It can take a physical and emotional toll. And it’s not just the elderly who feel this pain. It can affect people of all ages.

According to a 2018 survey by Cigna, loneliness levels have reached an all-time high. Nearly half the people surveyed reported that they sometimes or always feel alone. Four out of 10 also reported that their relationships are sometimes or always not meaningful and that they feel isolated.

Friends and family are one of the best cures for this disease. If you know people living alone, this a good time to reach out to them to make sure they’re okay and have everything they need.

Today’s quarantine could be a glimpse of what our lives will look like as we grow older. But life doesn’t have to be that way. In retirement, we should take the necessary steps to make sure social isolation and loneliness doesn’t happen to us by, say, moving closer to family members or good friends.

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 Lost and Found, Keeping My Balance and School’s in Session. Follow Dennis on Twitter @DMFrie.

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