Jonathan Clements's Blog, page 33
July 27, 2025
When an Index Fund is not an Index Fund
In fact, sometimes an “index fund” is not truly an index fund at all. Let’s unpack what that means—and why it matters for your money.
The Original Promise of Index Funds
When Jack Bogle launched the first index fund for ordinary investors in 1976, it was revolutionary. Instead of trying to beat the market, Bogle’s fund aimed to be the market—tracking the S&P 500 with low fees and no manager trying to time the highs and lows.
The beauty was in the simplicity:
Own a slice of everything.
Pay almost nothing to do it.
Let time and compound returns do their work.
That’s the classic index fund model: passive, rules-based, and cheap.
The Imitators Arrive
As index investing gained popularity, fund companies took notice. They started slapping “index fund” labels on all sorts of products. Some still hold true to Bogle’s vision. Others? Not so much.
Here are a few ways index funds stray from the path:
1. Too Niche to Be Neutral
Today, there are indexes for just about everything—cannabis, blockchain, space travel, even “emerging market internet.” These niche funds technically track indexes, but they often carry:
Higher expense ratios
Lower diversification
Bigger volatility
They’re not broad-market bets—they’re targeted plays wearing index labels. That’s not inherently bad, but it’s not the same as investing in the total market.
Rule of thumb: If the index is too specific, it’s probably an active strategy in disguise.
2. Smart Beta: Marketing or Meaningful?
“Smart beta” funds track indexes that are built using filters like dividends, volatility, or momentum. That sounds smart, right?
Maybe. But smart beta indexes often require a team to actively tweak the rules. That’s not truly passive. And you’re paying for it—with expense ratios 3–10x higher than a basic market-cap index fund.
If your index fund needs a research team to justify the strategy, you’re probably not getting the simplicity you signed up for.
3. Synthetic and Leveraged Products
Some so-called index funds use derivatives, leverage, or swaps to mimic an index. These are often:
Leveraged ETFs (e.g., “2x the S&P 500 daily returns”)
Inverse ETFs (betting the market will fall)
Commodities or volatility index funds
They may technically track indexes, but they behave nothing like traditional index funds. They’re for traders—not long-term investors.
4. High Fees with a Passive Face
Some funds quietly charge high fees even while hugging an index. Why? Brand recognition, distribution deals, or investor inattention. You might think you’re getting the same exposure as a Vanguard fund—but paying triple the cost.
Quick check: Compare the expense ratio. A true broad-market index fund should charge well under 0.10%. If you see 0.30%, 0.50%, or more? Walk away.
5. Tracking Error: What You Don’t See Can Cost You
Even if a fund claims to track the S&P 500, the devil is in the execution. Some funds lag the index due to poor management, bad rebalancing, or hidden costs.
Look at a fund’s tracking error—the difference between the fund’s return and the index it’s supposed to mirror. Consistent underperformance, even by small amounts, can compound into thousands of dollars lost over decades.
So… How Can You Tell the Real from the Imitation?
Here are 5 quick questions to ask before you invest in any index fund:
What index does it track? Is it broad (S&P 500, total US market) or niche?
What’s the expense ratio? Under 0.10% is ideal.
How many holdings does it own? Broad index funds should own hundreds or thousands of stocks.
Who manages it? Reputable firms like Vanguard, Fidelity, and Schwab have good track records.
Does it do anything “extra”? Leverage, smart beta, or niche strategies might be a red flag depending on your goals.
The Bottom Line
Index funds are one of the greatest innovations in modern investing. But the term has been stretched, distorted, and marketed far beyond its original meaning.
A fund that calls itself an index fund might still be expensive, risky, niche, or complex. If you’re investing for the long term, don’t fall for the label. Look under the hood.
Because when an index fund is not really an index fund… it could be the most expensive “cheap” investment you ever made.
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Recommendations for Retirement Planning Tools
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Secure Act 2.0 Reflections From Across the Pond
Almost half of working-age adults are not paying into a private or workplace pension, the government revealed this week. This headline caught my attention while browsing the BBC News website the other day, and it really made me think!
This is an awful lot of people imperiling their future lives, and with the UK's pension auto-enrollment system, now in its tenth year of operation, seeming to be pretty successful, it would suggest people are actively going out of their way to opt out of the system.
For you Yankees, auto-enrollment was a landmark UK policy, and it has helped bring millions more of the local population into pension saving. But I feel the "almost half" figure reveals that significant challenges remain in ensuring widespread financial security in retirement. It's a difficult issue that transcends national borders and most likely has some lessons for your own US Secure Act 2.0. There's no easy answer without touching on economics, psychology, and social policy.
What are the implications of not looking out for your future self? I can think of a few. Future poverty for one: A large section of the population facing retirement with only social security could lead to high levels of poverty and financial hardship in old age. This poverty can strip individuals of choice and dignity, leading to isolation, poor mental and physical health, and an inability to participate fully in society. It can mean cutting back on essentials like heating, food, or social activities. Not a good outcome, in my opinion.
Retirees with limited disposable income contribute less to the economy through consumer spending, with the knock-on effects impacting businesses and possible economic growth. A larger, less affluent retired population relying on a smaller working population can create tensions and hinder future economic dynamism. I know that within the HumbleDollar community I'm preaching to the choir, but it's still worth pointing these challenges out.
Can the US Secure Act, which makes auto-enrollment mandatory for many people starting in 2025, learn any lessons from the UK Pension Auto-Enrollment Act? The UK's "almost half" figure makes me think that even with a strong auto-enrollment system, a significant portion of the population might still opt out. Could this suggest that simply making it a default isn't a magic bullet? Similar challenges related to financial literacy, immediate financial pressures, and behavioral thinking that lead people to opt out in the UK will probably apply in the US. The Secure Act might need to consider accompanying measures to educate and encourage participation beyond just the default. I'm obviously not a US citizen, but this seems like a good start.
What other lessons can we learn? Just like the UK's issue with self-employed and multiple jobholders, your version has its own exclusions (e.g., plans established before a certain date, very small employers, governmental plans). These gaps will still leave millions without auto-enrollment. Even for those who stay enrolled, the default contribution rates might not be sufficient for a comfortable retirement. The UK faces this challenge, and the US will too. I think review of contribution rates and encouragement for higher savings are helpful. The UK is now in its tenth year and is reviewing its policy. The US will also need strong mechanisms to monitor the effectiveness of the Secure Act, identify persistent challenges, and be prepared to adapt policies over time.
I hope you don't mind me "sticking my nose in" and sharing my thoughts around your new Secure Act, and I apologize for any mistakes due to this Brit's possible lack of understanding around Secure Act 2.0. But I think the UK's situation is a good case study. I believe that while auto-enrollment is a good first step, it's not the end of the road. The implications of a large segment of any population not saving adequately for retirement are profound, affecting individuals, families, and the broader social and economic fabric. Both the UK and the US must continue to grapple with these complexities to secure the financial futures of their citizens.
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July 26, 2025
Seeking Input on Medicare Supplement Carriers
I actually like MOO for their generally good customer service, user friendly website, and fast claims processing. Twice in past years, I've been able to stay with MOO but avoid a price hike by switching to one of their sister companies, which I wrote about here.
It seems that option is no longer available, hence my looking into other carriers. I'm fortunate to have good health and should be able to pass medical underwriting.
I've gotten somewhat lower quotes from Humana and Cigna. I've gotten substantially lower quotes from two less familiar names: Banker's Fidelity (part of Atlantic Capital Life Assurance Co.) and Wellabe (formerly Medico).
I'd appreciate a post from anyone who's had experience with any of these companies, including their recent history of premium increases, customer service, website user friendliness, and claims processing. I'm particularly interested in hearing about Wellabe/Medico.
Thanks!
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July 25, 2025
Going to Extremes
Mauboussin surveyed all stocks trading on U.S. exchanges over a 40-year period, between 1985 and 2024. He found that the median stock experienced a decline of 85% at one point or another. Worse yet, more than half of these stocks never fully recouped their losses. The median stock recovered to just 90% of its prior high-water mark. Among those stocks that were able to reclaim their prior highs, it was a long process—about five years, on average. This would have tried any investor’s patience.
Those numbers only apply to the median stock, but suppose you had above-average stock-picking skills. How would things have turned out? If you had the foresight to pick the 20 best performing stocks over that 40-year period, they still would have delivered an agonizing drawdown of 72%, on average.
It’s hard to remember, but Apple dropped 83% at one point. Nike once lost 66%. Even Nvidia, which was the best performing stock over the past 20 years through 2024, lost more than 90% at one point. And most notably, Amazon was once down 95% from its prior high.
It’s known that the stock market is unpredictable, but these numbers provide additional insight into the market’s dynamics.
In general, the stock market is rational. Over the long term, share prices do move in tandem with corporate profits. When a company’s earnings increase, often its share price does too. The problem is that prices are only sometimes rational. Very often, stock prices disconnect from corporate earnings, and the gap can be significant. This was first proven empirically in the 1970s by Daniel Kahneman and his longtime collaborator, Amos Tversky.
In 1974, they published a paper titled “Judgment under Uncertainty: Heuristics and Biases.” It was one of the first papers in the nascent field of behavioral finance, and what they found was that investors exhibit an “availability heuristic.” That is, they tend to rely on the information that is most available. That’s a problem because the information that happens to be most available isn’t necessarily the information that’s the most accurate or even relevant. Often, the information that happens to come to mind is, as Kahneman and Tversky put it, the information that’s most vivid. In other words, extreme information or news becomes most memorable, and thus drives decision-making.
Later research built on this idea. In the mid-1980s, economists Werner De Bondt and Richard Thaler published a paper titled “Does the Stock Market Overreact?” They found that share prices definitely do overreact. A casual observer might find that conclusion intuitive, but De Bondt and Thaler were able to prove and quantify it. They looked at stocks that had either outperformed or underperformed by a significant margin in recent years, then examined their performance over subsequent years.
They found that stocks exhibiting extreme performance tended to reverse course. Strong performers lagged, and weak stocks often outperformed. The implication: Investors systematically overreact to news, driving stocks too far in one direction or the other.
It’s for these reasons Warren Buffett scolded investors for their short-term thinking. During the market slump earlier this year, Buffett commented, “If it makes a difference to you whether your stocks are down 15% or not, you need to get a somewhat different investment philosophy,” adding that, “People have emotions, but you got to check them at the door when you invest.”
On this point, Buffett’s late partner, Charlie Munger, was more blunt. “If you're not willing to react with equanimity to a market price decline of 50% two or three times a century,” Munger said, “you’re not fit to be a common shareholder.…”
In making these comments, Buffett and Munger weren’t being preachy; they knew from decades of experience what De Bondt and Thaler's research concluded—that the market is often irrational, and it can irrationally punish even the best of companies’ stocks. About 10 years ago, Buffett noted that Berkshire Hathaway—his own company—had seen its stock drop 50% on three separate occasions. “Someday, something close to this kind of drop will happen again, and no one knows when,” he added.
What complicates the equation is that the stock market sometimes makes an extreme move that’s justified and not the product of emotional overreaction. In January, for example, when Nvidia shares dropped 17% in a single day, it was in response to a potentially serious competitive threat. Similarly, Apple shares are down about 14% this year in response to some real concerns, including slowing iPhone sales, a weak position in AI and the impact of tariffs. Similarly, Alphabet—parent company of Google—has seen its stock underperform this year as AI tools like ChatGPT chip away at its market share.
Of course, no one knows where any of these stocks will go next. Whether it’s in response to tangible news, emotional overreaction, or some combination of the two, stock price movements will always be unpredictable. That’s a reality, but there is a way to mitigate it.
As noted earlier, Mauboussin found that the median stock suffered a drawdown of 85%, and even the best stocks saw a drawdown of 72%. But the S&P 500, a broad market index, never experienced a drop of that magnitude during the time period studied. The worst drop experienced by the S&P was 58%—terrible but far less bad than the experience of those individual stocks. I believe this is a key reason to avoid picking stocks and instead to invest using index funds.
In addition to managing risk, index funds offer another powerful benefit. As noted earlier, the median stock in Mauboussin’s study never fully recovered after experiencing a decline. But on average, stocks definitely do recover and significantly surpass their prior high-water marks. On average, stocks gained nearly 340% when they bounced back.
Why the distinction between the median and the average? It’s a technical point but an important one. The results for the median stock are unaffected by the performance of outliers. But outliers are the main driver of the market’s overall return. When a stock like Nvidia gains 86,000%, as it has over the past 20 years, that pulls up the average. While an investor who was exceptionally forward-looking, bordering on clairvoyant, might have purchased Nvidia shares—and held onto them—over the past 20 years, most wouldn’t have been that fortunate. Over the years, however, the S&P 500 has owned Nvidia, along with Apple, Amazon and the market’s other big gainers, helping the index to notch healthy gains.
The bottom line: Picking stocks can be entertaining. But according to the data, it’s not the most reliable way to build wealth. What’s the best way? Index funds. Why? They cast a wide net and are unaffected by emotion, allowing investors to benefit from the growth of exceptional stocks while simultaneously limiting the impact of drawdowns.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.The post Going to Extremes appeared first on HumbleDollar.
Raising Dough
Many of us confront this problem because of four scary expenses: housing, healthcare, student loans and child care. Take housing alone. By my calculations, it would take a six-figure income to buy a $435,300 home, which is the median cost of a U.S. home today according to the National Association of Realtors.* The median U.S. household comes up well short of this, with $78,171 in 2025.
With challenges like these, it’s time to add a new chapter to the financial planning textbook—how to make more money. What would you include in a “make money” playbook? I’ll pitch my ideas, but it honestly feels like I’m stating the obvious. You may have better ideas from your life. Please add them in comments—I look forward to reading them.
Here are my thoughts:
If you’re still in school, know what your college major pays before you—or your child—graduates. You can look up the average first-year earnings of many majors at specific colleges here. It’s a goldmine of nuggets like this: At Purdue, graduates in biology earn $33,500 a year, on average, versus $69,200 for mechanical engineers.
If you’re already in the workforce, continue your education by earning a professional designation or advanced degree. This makes you a trusted authority with your employer. Extra credit: Many employers, like mine, will pay the freight on a job-related degree.
Job hop for a big pay bump. I wrote about this once during the pandemic, when job seekers had the upper hand in salary negotiations. That may not be true now, except in specialty fields like AI. Back then, one commenter said that changing employers seemed disloyal. If you agree, seek out promotions with your current employer.
Teach what you know. Nearly half of all college faculty are adjuncts these days. The pay is only so-so in my experience, but it helps to organize your knowledge. Besides, you’ll be seen as a leader in your field.
The world of side hustles is enormous. I’ve done freelance work and found it slightly rewarding, but every dollar counted at that moment. I’ve made more by renting out an extra house that came with my farm property. If you go the side-hustle route, just try not to wear out your car delivering passengers or pizza.
I have a second category of suggestions related to cutting expenses. No, I don’t mean draining the fun out of life, say, by never eating out. These ideas won’t diminish your quality of life but might save you tons of money:
Unless you’re a gearhead, buy a used car and run it for many years. You may save tens of thousands on each car purchase without sacrificing mobility. When repairs get to be a hassle, buy another used car with the savings you’ve stacked away. You don’t have to own a clunker. I’ve been driving Volvos.
Pay your credit card in full every month. Use the card as much as you like, as long as you never carry a balance. My card pays me 2% cash back, but you may prefer airline miles.
Reframe the college decision by refusing to borrow more than one year of future pay in the student’s field. For example, a nursing student at the University of Connecticut wouldn’t borrow more than $69,400—the average pay nursing graduates receive. Can’t be done? Ask for more aid or try another school.
Stay organized and on top of your finances. I’ve paid a penalty for paying bills late or carrying unwanted subscriptions. Sigh. Your bank, your credit card, even your local parking authority would love to dun you with mindless charges. Try not to let them.
I hope this helps someone. Now, what are your ideas?
*I assumed a 20% down payment and a 7% mortgage rate and kept the monthly payments at 30% of total income. Those who spend a higher percentage of their income on housing are deemed “cost-burdened” by the U.S. Census Bureau, but many are stuck there.
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Pedaling Away From Tightness
I love cycling and probably ride around 1,000 miles per year on my normal bike. But I have to tell you, it's a challenge at my holiday home because there's a lot of hilly terrain to conquer. My dream of biking the wonderful coastal routes around my home over this summer was in serious jeopardy of not happening, or being curtailed to the easier routes.
I'm normally a very generous person, but when it comes to personal spending on myself, it's another story entirely. Tight is the word that comes to mind, and adding extremely to the beginning of that wouldn't be a stretch of the imagination. But after weeks of indecision and hours of looking, I eventually cracked open the wallet and spent a bit of cash on myself, much to the very large sigh of relief from my wife, Suzie, because I'd talked her ears off about my buying dilemma.
So on the face of it this hasn't a lot to do with finance and retirement, and in truth it doesn't. I just wanted to tell people what a great thing this e-bike is, but if I dig down a bit deeper, there are some lessons to learn. My gift to myself is a great enabling device that lets me continue doing something I enjoy. It definitely benefits my mental health and well-being, a great plus at any stage, but particularly as we age. It can also be looked at as an investment in preventive care, encouraging me to exercise and improve my physical health, and that's definitely going to pay dividends for my future self.
Then there's the experiential spending over purely material possessions. Instead of buying more "stuff," I've invested in something that directly enhances my quality of life and allows me to continue a passion. This kind of investment in experiences can provide greater long-term satisfaction and contributes more to overall well-being, which is crucial for a fulfilling retirement.
But deep down, I think I'm just trying to overcome and justify a reluctance to spend on myself. And if we think about it, that's another issue many need to overcome in retirement. Finding a reason that has meaning for you might make this transition to personal spending easier. Find your passion and give yourself permission. And you just never know. Maybe a super cool e-bike might help you come to terms with this problem, even if, like me, you just happen to have two perfectly fine bikes already!
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Letting Go
That’s a question I’ve had to face. I’m hoping both of my 30-something children will use my bequest to bolster their long-term financial future, adding the money to their portfolio and perhaps using a portion to buy new homes.
Both have good financial habits, and the money they’ll receive could—if used sensibly—mean they’ll be far wealthier in their 60s than I am. But, of course, there are no guarantees. Perhaps their spouses will argue for using the money in other ways. Perhaps they’ll commit some major financial blunder. Perhaps the money will make them the target of some scam.
Meanwhile, because I’m remarried, I could have used a trust arrangement to leave money to my wife Elaine, and then have what remains pass to my two children upon her death. But I didn’t go that route. Instead, I’ve asked Elaine to leave at least part of what I give her to the kids. She’s promised she will, and I totally trust that she’ll do so. But I can also imagine scenarios where it won’t happen. What if she gets hit with, say, huge long-term-care expenses?
As the joke goes, it’s tough to make predictions, especially about the future. But that’s also why I’m not inclined to bequeath the money with any strings attached. Besides the cost of complicated trust arrangements, what if Elaine or my two kids get hit with a large and urgent financial need? I’d rather not tie their hands.
I’ve told Elaine and the kids what they can expect from my estate. I’ve made it clear I don’t want any quibbling over my will, my beneficiary designations, the division of my possessions and my funeral arrangements. As detailed in the recent posts from Dana Ferris and Marjorie Kondrack, as well as the comments those posts triggered, such fights can cause hefty emotional damage, and I’d be appalled if anything like that happened after my death. But I also believe the best course of action is to clearly express my wishes, and then trust that they'll be respected.
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July 24, 2025
Has anyone used iBonds to build a bond ladder?
Here is how iShares describes this product: "iBonds exchange-traded funds (“ETFs”) are an innovative suite of bond funds that hold a diversified portfolio of bonds with similar maturity dates. Each ETF provides regular interest payments and distributes a final payout in its stated maturity year, similar to traditional bond laddering strategies. However, the funds’ unique structure is designed to help investors easily build bond ladders with only a handful of funds."
The expense ratios on the iBond Target Date Maturity ETFs range from 7 basis points for U.S. Treasuries; 10 bps for TIPS, Municipals, & Investment Grade Corporate; and 35 bps for the “High Yield & Income Corporate” ETF.
7 – 10 bps seems extremely reasonable for the increased diversification and professional purchasing/management of iBonds. Anyone care to comment?
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Selling Your House and Reaping Tax Free Capital Gains May be in Jeopardy
The National Association of Realtors forecasts that by 2035, close to 70% of homeowners might have gains exceeding $250,000 and 38% of them will have more than $500,000.
Per AI
I just read an article in which it was reported that in comments to the press on Tuesday the President suggested he is considering eliminating capital gains taxes on the sale of homes.
The article reviews the rules to claim this benefit which is definitely in the near(er) future for Humble Dollar readers
If you have lived in it as your primary residence for at least 24 months (consecutively or not) in the previous five years before you sell it, you may be allowed to exempt from the capital gains tax the first $250,000 of your gains if you’re single or $500,000 if you’re married filing jointly. The capital gains exemption thresholds have not adjusted for inflation since they were set in 1997.
In 2025, filers will owe 0% in capital gains tax for gains above the exemption threshold if their taxable income is below $48,350 (or $96,700 if married filing jointly), according to the IRS.
They will owe 15% if their income is between $48,450 and $533,400 (or between $96,700 and $600,050 for joint filers). And any filer with income above those levels will pay a 20% capital gains rate.
To be able to claim the full exemption for couples after death of a spouse:
You must sell the home within two years
You must not have remarried at the time of the sale.
Neither you nor your late spouse can have taken the exclusion on another home sold less than two years before the current home sale.
You must meet the 2-year ownership and residence requirements. This includes your late spouse's ownership and residence time, if applicable.
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