Jonathan Clements's Blog, page 34

What’s the Best Way to Measure Investment Performance?

In tracking how your investments are doing, there are several ways to measure performance, but they don’t all tell the same story:

Simple Average ReturnCAGR (Compound Annual Growth Rate)TWR (Time-Weighted Return)IRR (Internal Rate of Return / Dollar-Weighted Return)

Each method offers something different depending on the context, lump sum vs. ongoing contributions, investor vs. fund manager perspective, etc.

1. Which return metric do you personally rely on most and why (IRR, CAGR, etc.)?

2. Do you think most people understand the difference between simple average and CAGR — or do you think this is an overlooked source of confusion?

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May 2025 Moving Averages

As a calming influence, here’s the latest about moving averages. The S&P 500 closed May with a monthly gain of 6.2%, the largest since November 2023.   However, Morningstar published an article today "Has the Stock Market Reached Peak Optimism on Tariffs? - Strategists say equities have already priced in the good news on tariffs as the trade war grinds on." I’ll periodically post if I become aware of changes of merit.

As of today (June 3, 2025), SPX index 200-day simple moving average is 5787.75, with the most recent change of +2.51 (+0.04%) on June 2, 2025.
Over the past year, SPX index 200-day SMA has increased by +1009.50 (+21.13%).
SPX index 200-day SMA is now at all-time high.

SMAs (Simple Moving Averages) for Vanguard’s Total Stock Market Index ETF, Vanguard FTSE All World Ex-US ETF and the iShares 7-10 year Treasury Bond ETF each indicate that one should be invested at this time.

Recently, the 10- and 12-month simple moving averages for the S&P indicated “cash” but after three months this shifted to “be invested”.  I don’t use these as sell indicators because I see the moving averages as one of several barometers for investor sentiment.  They make it easier for me to comprehend some of the positions taken at the HD and other forums.

I’m not making any kind of recommendation.  As usual this is “Caveat Emptor”. Readers should be aware that I don’t jump in and out of the markets and I keep busy with other things so as to avoid the daily noise.

I suggest we each consider our investing approach and tolerances. I’m a “buy and hold” investor of ETFs and individual stocks.  I judge the merit of individual stocks by the products and management of the companies involved.  I usually sell a portion if a stock exceeds an arbitrary upper percentage limit in my portfolio, or if something changes at the company.  In other words, I seldom sell anything and in the past 18 months I added to my equity positions and using the DRIP approach added stock using dividends.  I occasionally buy on the dip.  I’m retired so I only buy if I have free cash or sell something. I’ve been holding cash to avoid a sale in a down market. With cash yielding 4% or more, it is an attractive option to me, but does not replace stocks because of my inflation concerns.

One may have noticed that recent upheavals have been sharp. Using averages isn’t predictive. It is somewhat like driving by looking in the rear view mirror, or walking out the door and then noticing that “it is raining”.

Why use simple moving averages? Proponents say that a strategy which uses 10- or 12-month simple moving averages (SMA) would have ensured participation in most of the upside price movement since 1995 while reducing losses.  But don’t expect to exit at the top or enter at the market bottom.

There are a number of websites that publish moving averages and SMA charts for different indexes.  The interested should do a search. However, I cannot vouch for the accuracy and that is something to keep in mind.

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Full Circle With Jonathan Clements

My first encounter with Jonathan was at an annual client appreciation event in Hershey, PA hosted by my in-laws’ financial advisor, Tim Decker. My wife Lisa and I attended as guests of her parents. The snacks served were nothing special, but the evening was still very worthwhile. Tim gave an “state of the union” update for his many clients in attendance and then turned the microphone over to Jonathan for the keynote presentation.

I can’t recall any details from Jonathan’s talk that night a decade ago but I remember finding it quite interesting. I was happy to leave with a signed copy of his book Money Guide 2015, which is sitting on my desk in front of me as I type this. It wasn’t until about eight years later that I was re-introduced to Jonathan, when I stumbled across HumbleDollar.

As fee-only advisors, Tim and his associates have done a good job for my in-laws. My father-in-law passed away a few years ago but my 91-year-old mother-in-law remains a satisfied client. Knowing I had an interest in personal finance, over the years Mom would occasionally pass along information or advice that Tim provided. Eventually, I got on Tim’s mailing list and started listening to podcasts of his weekly radio program that airs on a local AM station. I even paid for an hour of Tim’s advice several years ago when I first started contemplating retiring.

I’m a bit sporadic listening to Tim’s podcast these days. I typically scan the weekly email topic summary to see if anything catches my interest. Today’s email included the following: “Tim announces that a very special, well-known guest will join him for the show on June 21.”

HumbleDollar readers are a sharp bunch and you already know the rest. Jonathan is that special guest. I may try to tune in live to WHP 580 at 10 AM (EST) on June 21, but at the very least, I will listen to the podcast. You can too:   Financial Freedom

 

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Dreams I Had by Jonathan Clements

When you were in your 20s and 30s, what did you dream of doing—and why weren’t those dreams realized? Here are four of the daydreams I had, but which remained just that:

Buy a sports car and drive across the country. This one got nixed by a host of factors—not enough vacation time, lack of money, the arrival of my first child at age 25. But truth be told, what seemed like a fun adventure slowly lost its allure, as I imagined long hours on the road.

Purchase and edit a small town newspaper. I got my start in journalism at age 19, working for a tiny newspaper in the Maryland suburbs of Washington, D.C. In the years that followed, even as I worked for major publications, I mused about the possibility of running my own paper. If it had become a real possibility, I suspect I'd have quickly realized I couldn’t afford my dream, given the need to save for retirement and to put two kids through college. Still, this daydream sort of came true. I may not be running a small town newspaper, but I have had the chance to run my own publication, thanks to HumbleDollar.

Explore the U.S. in an RV. This dream never got very far. Yes, I spent time scouring the internet for different types of RV. But I was always put off by the idea of driving the darn thing. Even small RVs seemed uncomfortably large. And burned into my memory is a scene from Fort Worth, where I was attending a conference. I watched as a couple tried to navigate the city’s streets in their RV. I don’t know whether they were stressed, but I sure was, and I was just a bystander.

Buy a beach house. This particular dream came a little later, in my early 40s. My favorite town on the New Jersey shore is Ocean Grove. I’d often stop there for lunch and a walk, and every so often I’d bicycle the 42 miles from my home in central New Jersey to Ocean Grove. In 2007, as property prices tumbled, I toyed with purchasing a small home or an apartment, and even checked out a handful of properties. But all of them seemed either overpriced or too rundown. In this case, my dilly-dallying proved fortuitous. Ocean Grove got badly roughed up by 2012’s Hurricane Sandy.

So, what dreams did you let slip away?

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Why Bitcoin?

I've been investing since the early 1980s. I have a business degree and took investing classes. A close friend of my parents wrote the first investing book I read at age 10, called Stock Market ABC by Joanne K. Friedlander and Jean Neal, published in 1969 and given to me on my 10th birthday in April of that year. This started my interest in investing. I also have a background in technology, going back to 1982. I started a technology consulting practice 15 years ago and continue to be a successful player in the field. This combination of background and interests was the genesis of my interest in Bitcoin. I was searching for a way to mitigate risk in my portfolio. Bitcoin's design makes it an interesting investment option for those seeking a hedge against currency debasement and the irresponsible fiscal governance most countries suffer. With a relatively small investment in Bitcoin, you can add alpha to your portfolio safely and innovatively. If you want to know more about it, please ask questions here, and I'll respond with advice on books, websites, and podcasts you can consume to increase your understanding and appreciation of this new asset.

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Up Because It’s Up

BITCOIN HIT A NEW high last week, topping $112,000. Over the past 12 months, it’s climbed an impressive 55%.

What’s driving this gain, and what should you make of it? I believe there are three key factors. Two are new. One is not.

The first factor was a policy change last year. The federal government approved the launch of new exchange-traded funds (ETFs) that offer easier and more direct access to bitcoin. Following this rule change, 11 new bitcoin ETFs were launched in quick succession. These new funds collected more than $100 billion in assets, which then helped drive up bitcoin’s price—and sparked even more interest among investors.

The second factor was the Trump administration’s friendlier posture toward cryptocurrency. The president declared his intention to become the “crypto president” and issued executive orders loosening restrictions on crypto firms. There is now a “crypto czar” in the White House. The administration also discussed the idea of funding a strategic bitcoin reserve akin to Fort Knox.

A third factor, however, may be the most powerful driver of bitcoin’s gains: The reality—justified or not—that asset prices tend to go up when other people think they’re going to go up. While this might sound circular, it’s a well-understood economic concept, one first articulated by John Maynard Keynes in his 1936 book, The General Theory of Employment, Interest and Money.

Keynes compared the stock market to what he called a “reverse beauty pageant.” Investors, he said, were no longer looking to choose the most attractive investments. Instead, “we devote our intelligences to anticipating what average opinion expects the average opinion to be.” In other words, investors want to buy what they think other people will want to buy, regardless of the investment. Using that yardstick, bitcoin looks eminently appealing. In addition to its most recent runup, bitcoin delivered more than a 1,000% gain over the past five years and is clearly what other people want to buy.

To a degree, investors’ attitude toward bitcoin is rational. There’s a concept known as “rational ignorance” that helps explain some of the enthusiasm. According to this theory, there’s too much going on in the world for any one person to follow. Instead, we rely on the opinions of others to help fill in our knowledge gaps. If someone else has done the research and reached a conclusion on a particular topic, it makes sense for others to piggyback on his or her efforts. While this can be helpful, the fly in the ointment is that this same channel can inflate investment bubbles.

A related concept also helps explain the rise of bitcoin. It’s what author Chimamanda Adichie refers to as a “single story.” Whenever there’s a simple, easy-to-understand story associated with an idea, that story will help spread that idea. Bitcoin has several compelling stories. One is the idea that, unlike traditional currencies, it’s independent of any government’s control. Another is that its total supply is structurally limited to 21 million coins, making it resistant to inflation. There’s also mystery surrounding its creator, who used the pseudonym Satoshi Nakamoto but has never been identified. No one has ever even claimed to know someone who knows him.

I believe these stories help explain much of bitcoin’s popularity. No one really knows where it will go in the future, but because bitcoin seems like it’s going somewhere, more people are likely to get on board.

In fairness, investors have been taught to believe in markets and to trust market prices. This is the cornerstone of the efficient market hypothesis (EMH). This theory—for which economist Eugene Fama won a Nobel Prize—argues that asset prices are always “correct” because they reflect all available information. According to the EMH, if bitcoin is trading at $112,000, then that must be the right price, because it reflects the collective wisdom of millions of investors everywhere.

This notion, that prices are “informationally efficient,” goes back as early as the 1900s when a fellow named Francis Galton conducted an experiment at a livestock exhibition. He set up a lottery, asking contestants to guess the weight of an ox on display. He collected 787 votes, and then compared the average to the actual weight of the animal. The crowd was remarkably accurate: The average guess was 1,207 pounds, while the actual weight of the animal was 1,198 pounds. Galton dubbed this vox populi—the voice of the people.

More recently, author James Surowiecki took a closer look at this phenomenon in a book titled The Wisdom of Crowds. Surowiecki points out that crowds aren’t always accurate. Instead, the following criteria are required for the vox populi to deliver a reliable answer: 

Diversity of opinion.
Independence of opinion.
Decentralization of available information.
A mechanism for aggregating opinions.

I believe this is where the bitcoin story is flawed. Markets today are generally not independent. In the age of the internet, opinions are rarely independent. Investors all influence each other, especially when it comes to something like bitcoin. Bitcoin has turned people into millionaires and even billionaires because opinions are shared broadly and publicly. Services such as Google Trends can quantify this. This constant public discussion sits in contrast to the secret ballots cast at the livestock competition, where each contestant made a strictly independent judgment.

Hedge fund manager Clifford Asness argues that this phenomenon reaches beyond cryptocurrency. Because the internet—and especially social media—have made communication so easy, Asness says, the collective investment judgment of crowds has gotten worse, not better. He calls this the “less-efficient market hypothesis.”

Bitcoin’s gains may make it appear that it has a solid foundation. I believe, however, it’s like constructing a building on quicksand. A quick survey of bitcoin’s peers helps illustrate why. For starters, there are now thousands of different coins. One online tutorial describes how easy it is to create a new crypto coin. That’s why creations like the TRUMP coin, launched this January just before Inauguration Day, have achieved market capitalizations in excess of $2 billion.

If coins like this can be created out of thin air and gain millions or billions of dollars in value, there’s no reason to see bitcoin as being less of a mirage than its more obviously comical brethren. I believe the only reason bitcoin carries more legitimacy is because it was first. But as economist Owen Lamont points out, that doesn’t mean it has value that’s more tangible than other crypto creations. “We buy bitcoin because we believe others will buy it in the future,” he says. It’s the “Kardashian of money”—famous only because it’s famous.

In his book Narrative Economics, Robert Shiller puts it this way: “People are interested in bitcoin precisely because so many other people are interested in it.”

It’s for this reason that I recommend standing clear of the frenzy. Unlike real investments such as stocks, bonds and real estate, which carry intrinsic value—that is, the ability to generate income—bitcoin has nothing tangible supporting its value. It is only valuable because it’s popular. But as tulip investors learned the hard way in the spring of 1637, sentiment can shift quickly.

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.

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Going too far with FIRE: The downside of being in the financial advice business – RDQ

I always thought the glowing stories of FIRE folks were a bit dodgy. Much of the time they aren’t even retired in the traditional sense. Sometimes they go too far sharing their acquired wisdom for cash.

I followed one blogger for several years. She shared her frugal ways, extreme in my view like buying her two-year olds shoes in a second hand thrift shop. She wrote a book, gained a lot of publicity, was featured in news articles and gave advice. 

She answered questions on her blog, invited readers to send in case studies which she analyzed and then provided advice. In the past, when I attempted to post a comment questioning her advice, they never appeared. 

Then based on her experience, she began providing advice for a fee, she was now a financial consultant. She changed the blog to accommodate her new service. 

A year ago I noticed there were no updates on the blog, posts are now a year old. She still advertised for clients, but it was otherwise silent. Recently I clicked on the “hire me” button and it said she was not accepting new clients at this time. 

What happened to the famous Mrs. Frugalwoods who had gained widespread publicity for her financial acumen writing extensively about how to save money and live a good life retired in your 30s? She just seemed to disappear. 

I finally found the answer. She ran afoul of Vermonts security laws. Specifically she was charged in a consent order.

 “WHEREAS, as a result of the Department's review, the Department has concluded that Respondent violated the Securities Act by providing investment advice for compensation in Vermont without registering as an investment adviser or investment adviser representative and without qualifying for any exemption from registration.” She agreed to a fine of $7,800. The order states no-one was harmed.

It was providing her financial advice for (pretty hefty) compensation that did her in.

My cynical mindset asks, if her household (husband and two young children) FIRE worked so well, why did she need to sell her services? 

Here is the dream she is promoting on her blog. 

“By taking control of our money, my husband and I were able to pursue our dream of moving to a homestead in rural Vermont. He retired early, and I left my unfulfilling job to focus on helping people like you. Let me show you how to make your money create the life you want.”

A lot of us do our best to take control of our money, but don’t drop out in our 30s and then present a lifetime of knowledge and experience to others. 

At least when I pontificate it is based on 80 plus years of dealing with the vicissitudes of life - mine and others. 

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Dual Momentum?

I recently posted on the forum (thank you for the responses) about getting out of the market, but that wasn't the full story....

We've been invested 100% in stocks for a number of years and have reaped the rewards, however, general anxiety and market fluctuations don't mix. I hated giving up the gains by migrating to a 60/40 (I am a victim to recency bias) and after reading Gary Antonacci's Dual Momentum, I thought I had found the solution to my quandary.

DM strategy told me to sell the stocks in March or perhaps April, but I didn't get back in since the strategy calls for reviewing annual returns monthly and the market had climbed dramatically. In that time, I've realized that DM has not cooled my emotions one bit.

My question to all you erudite investors who have read Antonacci's Dual Momentum strategy, "What are your thoughts?" I'll sheepishly admit that I was unable to backtest the strategy and there is minimal research.

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Mr. Quinn would be nervous. Would you be?

Towards the bottom of Mr. Quinn's lengthy thread on spreadsheets and budgets I mentioned that I expect to spend a bit under 1% of my portfolio this year. Dick said that he would feel nervous in that situation. I am not currently feeling nervous, but since that percentage will increase over time, maybe I should be. I thought I would ask my fellow contributors what they thought.

Some background: I agree with Dick in seeing my income as just Social Security, with COLA, and a company pension, with no COLA. In fact, the pension was frozen when I reached 30 years service in 2000, and has lost value ever since. I expect my SS to overtake it in a couple of years. It's true, that at almost 78 I have been taking RMDs for several years, and the IRS considers that to be income, but since, after QCDs, I simply move the funds from my IRA to my brokerage account, I don't. Equally, the interest and dividends in my brokerage account are on automatic reinvestment.

As I expect my medical costs to increase above the rate of inflation, and the monthly fees for my CCRC will probably do the same, I will need more than 1% from my portfolio in future years. I should mention that the portfolio exists solely to make up for the lack of a COLA on my pension. Leaving a legacy would be nice, but as I have no biological children it is not a priority. 

If I take the current value of my portfolio (which has increased since the last time I looked), subtract a guesstimate $50,000 for what will likely be my last car and divide by 22 (years to 100), the result is 11.5% lower than my annual SS plus pension, before taxes. In other words, I believe I could nearly double my gross income without a risk of running out of money.

No doubt Dick would still feel nervous, but should I?

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A Lesson in Accountability

I worked up quite an appetite at the gym late this morning. Luckily there is a great little diner just 2 doors down in the same strip. I’ve always enjoyed great food and friendly service at the Sunrise Skillet, but today was a little different, as service was a tad slow. Honestly I was preoccupied perusing my smart phone and barely aware of the time. Eventually my waitress, Britt, came to my booth, empty handed, telling me that she was paying for my lunch because she forgot to put in the order. 

It’s always nice when things go precisely as they should, but it’s not realistic to think that mistakes will never be made. What impresses me is the manner in which people deal with their mistakes. In this case Brittany owned her screw-up, she really felt bad about it, made no excuses, and was willing to dip into her pocket to make things right. Brittany earned my loyalty for life. No way was I going to let her buy my lunch. After a little back and forth over who’s paying, she reluctantly took my credit card. 

Wouldn’t it be nice if all businesses had the same integrity and work ethic as this age 20-something waitress?

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