Jonathan Clements's Blog, page 349

Yet Another Reason

I FEEL LIKE a broken record when I talk about the benefits of index funds. Indeed, index fund advocates���myself included���sometimes get a little preachy, so I won���t bore you with the same facts I���ve cited before.

Instead, I want to focus on a more subtle reason to index, which has been highlighted by the stock market���s behavior over the past year. You���ve probably heard the expression ���a rising tide lifts all boats.��� When it comes to the stock market, this is generally true���but only sort of and only some of the time.

The reality is that the stock market consists of many sectors���everything from technology to health care to energy. In all, the S&P 500 breaks down into 11 different industries. To continue the rising-tide analogy, each of these 11 sectors is like its own small boat. Sometimes they move together, but often not.

As an individual investor, these dynamics are worth understanding. The past 12 months provide a perfect laboratory for seeing them in action. Between early October 2018 and early October 2019, the overall S&P 500 was virtually unchanged. But pull back the curtain to examine each of the 11 industries, and the results have hardly been uniform. In fact, they could hardly have been more different.

What was the best performing industry over the past 12 months? Probably the last one you���d guess: the utilities industry, comprised of electric, gas and water companies. As a group, utilities gained more than 25%. What was the worst? The energy industry, which was down 24%. In other words, there were nearly 50 percentage points separating the best and worst sector. How did the communications sector���home of Google, Netflix and other popular stocks���fare? It was barely positive.

These types of divergences occur all the time, but sometimes they���re greater than others. According to an��analysis by Goldman Sachs, stocks moved as a relatively tightly correlated group for many years after the 2008 recession, as the market marched higher. But over the past year, that correlation has broken down. In late September, as the market approached record highs,��only 106��individual stocks within the S&P 500 were themselves at record highs.

What explains these divergences? Each industry is driven by its own dynamics. Energy companies often move in virtual lockstep with oil prices. Other industries will move together in response to a big multi-year trend. The growth of smartphones, for example, has lifted the stocks of all companies in that food chain, from manufacturers to component suppliers to owners of cell towers.

Sometimes, groups of stocks will respond to a very specific event. In 2011, the shares of all computer hard drive makers were hit when monsoons swept through Thailand, damaging factories where a large portion of the world���s hard drives are made.

At other times, stock movements have more indirect causes. During 2018���s last three months, when people began to fret about the impact of higher interest rates, the stocks of highflying companies took a steep dive. Netflix dropped 28% in just three months. Where did investors go during that period? Into so-called safe haven stocks like Procter & Gamble, which makes toothpaste, diapers and paper towels���items that people continue buying through good times and bad. That company and its peers tend to do extraordinarily well when people get scared.

Innumerable other factors impact the fortunes of individual industries. These include inflation, regulation and, most recently, tariffs.

There are lots of people on Wall Street who make their living tracking things like oil prices, industrial production and a thousand other economic indicators. But in the end, as recent months have shown, it���s impossible to know where any of these numbers are headed. That���s because so much of what happens in the economy is random, like the flooding in Thailand, or it���s dependent on decisions by policymakers, who themselves��probably couldn���t tell you��how things will turn out next month or next year.

All of this, in my view, is yet another reason to cast your lot with index funds���and not just any index fund, but total-market funds whose broad diversification will help limit the damage when a storm hits any one industry.

Adam M. Grossman���s previous articles��include Peter Principles,��But Will It Work��and��Staying Positive . 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 .

Do you enjoy the articles by Adam and HumbleDollar’s other writers? Please support our work with a�� donation .

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Improving the Odds

WE HEAR ABOUT highflying stocks and hotshot money managers, and it���s easy to imagine the streets of lower Manhattan are paved with gold. But the truth is a tad more mundane.

Want some reasonable assurance of investment success? We should shun the excitement of trying to pick winners and instead focus on more prosaic portfolio tweaks. The overriding goal: ensure the compounding of our investment dollars encounters as little friction as possible.

Minimizing this friction will, I believe, be especially important in the years ahead, because stock and bond returns will likely be below their historical averages. What to do? Many HumbleDollar readers are heavily invested in low-cost index funds, so they���re already well-positioned to capture the market���s return with minimal loss to investment costs. But don���t stop there. Here are five other steps that should speed your portfolio���s progress:

1. Cashing in. As brokerage commissions shrink, trading spreads tighten and investors flock to index funds, it���s become harder for brokerage firms to make money. But there remains one favorite way to milk customers: Pay them little or nothing on their cash balances.

Many brokerage firms offer money market mutual funds with reasonably high yields. Despite that, their designated cash sweep account���the place money goes if, say, we sell a stock���is often a bank account with a modest yield. To earn more, customers need to move cash out of this sweep account and into a higher-yielding money market fund.

Sound like work? This is a reason to invest at Fidelity Investments or Vanguard Group. Both use government money market funds with decent yields as their sweep account.

2. Taking risk. I realize this might sound odd, but if we���re worried that the stock market will deliver subpar returns in the decade ahead, arguably we should allocate more to stocks. Why? Even if stocks deliver modest returns, they should still outpace bonds and cash investments, so a heftier stock allocation ought to bolster our long-run performance.

But that suggestion comes with two caveats. First, there���s a grave risk of lousy short-run returns, given today���s lofty stock market valuations. My suggestion: If you decide to keep, say, 70% in stocks rather than 60%, make the shift slowly over 24 months, thereby reducing the risk that you buy heavily on Monday and get hit with a market downdraft on Tuesday.

3. Going global. That brings me to my second caveat: To ensure you capture the stock market���s return, use low-cost total market index funds���and be sure to diversify globally, because there���s no guarantee U.S. stocks will continue their recent dominance.

Not sure you can stomach investing abroad? Check out Vanguard Total World Stock ETF, which wraps together 56% U.S. stocks, 34% developed foreign markets and 10% emerging markets. The fund charges just 0.09% in annual expenses, equal to nine cents a year for every $100 invested.

Yes, if you buy Vanguard Total World Stock, you���ll end up owning foreign stocks���and, indeed, far more than most U.S. investors are comfortable with. But because you���ll have the world���s stock markets bundled together into a single fund, much of the daily carnage will be muffled by the fund���s broad diversification and that might make you less inclined to second-guess your international holdings.

Today, many indexers go for the three-fund portfolio: a total U.S. stock market index fund, a total international stock index fund and a total U.S. bond market fund. But if you buy Vanguard Total World Stock and couple it with a total U.S. bond market fund, you go one better���trimming your holdings to just two funds and yet still enjoying global diversification at a tiny cost.

4. Managing taxes. If you hold a two-fund portfolio���or, indeed, any portfolio that combines broad stock market index funds with taxable bond funds���aim to hold the taxable bond funds in a retirement account, so you can defer taxes on each year���s income distributions.

Meanwhile, broad stock market index funds are a great choice for a taxable account, because they shouldn���t generate big taxable gains each year���and any gains should be taxed at the favorable rate on qualified dividends and long-term capital gains. Keep in mind that, to have the precise asset allocation you want, you may end up with part of your stock fund holdings in a retirement account. Alternatively, if your retirement accounts are on the skimpy side, you might need to keep part of your bond holdings in your regular taxable account���at which point high-income earners may want to investigate tax-free municipal bonds.

As you work to improve your so-called asset location, also pay attention to whether you should fund tax-deductible or Roth retirement accounts���and whether this would be a good year to make a Roth conversion. Thanks to 2017���s tax law, folks currently have the chance to make relatively large conversions to a Roth IRA and pay federal income taxes on the sum converted at 24% or less.

5. Minimizing foolishness. Many investors���professional and amateur���tell me they take an occasional flier on a stock or two. Some even have a ���fun money��� account, where they allow themselves to trade with maybe 5% of their portfolio. The rationale: This fun money account offers both entertainment and an emotional outlet, so they���re less inclined to mess with the rest of their portfolio.

All that���s understandable. Still, in all likelihood, that fun money account will be a drag on a portfolio���s long-run return. Want to improve investment performance? Maybe we should find other, cheaper ways to entertain ourselves.

The above five steps should help speed our portfolio���s growth. But I���d be remiss if I didn���t mention the most obvious way to compensate for lower returns: save more. As I noted two weeks ago, perhaps half of our eventual retirement nest egg will reflect the actual dollars we sock away. How can we make our portfolios grow faster? Saving more is the most reliable strategy.

Of course, to save more, we���ll need to spend less. Try going through your check book and recent credit card statements, and question every expense. There may be automatic monthly charges that you don���t even realize you���re incurring, perhaps because you���ve forgotten about them or you neglected to cancel after the free trial period ended.

Meanwhile, there may be other costs that you simply take for granted, like the landline you never use or the premium cable package with channels you never watch. And what about that large storage locker that costs $200 a month? After a decade, you���ll be out $24,000, plus the investment gains that the money could have earned. Does anybody care about the stuff in the storage locker���or is it time to do yourself and your heirs a favor, toss everything and save $200 a month?

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include 50 Shades of Risk,��Show Me the Money��and��Timely Reminder. Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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Mild Salsa

BALANCED FUNDS are a great first investment for those with a moderate risk tolerance. But which fund? Vanguard Balanced Index Fund Admiral Shares, with its incredibly low 0.07% expense ratio, $3,000 investment minimum and mix of 60% stocks and 40% bonds, is the standard by which all balanced funds should be judged���and it���s likely your best choice.

But if it isn���t one of your 401(k) options, chances are you���ll find the plan includes one or more of the other five funds in the accompanying chart. They���re the largest and arguably the most successful balanced funds and, together with Vanguard Balanced Index Fund, are among the 10 biggest in the 401(k) market.

They���re also good choices. These longstanding brand names don���t have the buzz of bitcoin or smart beta ETFs. But they continue to deliver generally consistent, solid results. Their average age is 62 years. Through many management changes and many market crises, their parent companies have kept them largely on track.

Most balanced funds are actively managed. That means that, since the Vanguard index fund���s inception in 1992, they have tried to beat it, rather than match it���a difficult feat, but one that two of the five actively managed funds in the chart have accomplished over the past 15 years, while the other three weren’t far behind. These were also the five largest balanced funds 15 years ago���and they���ve lived up to their reputations.

Each has its own distinctive appeal. Whereas Vanguard Balanced Index Fund offers exposure to the entire U.S. stock market and only investment-grade bonds, some of the active funds have juiced returns with lower-quality bonds, including junk bonds. Fidelity Puritan currently has the lowest-quality bond rating of the group, at the last rung of investment grade, according to Morningstar. The index fund���s top-quality bonds will hold up better in bad times. The higher expense ratios of the active funds can incentivize them to increase risk, with an eye to boosting returns and thereby overcoming the drag from their higher annual expenses.

Most of the actively managed balanced funds have more of a large-company investment focus than the index fund does. Some use a growth style, others value and some have significant foreign exposure, which has detracted from returns over the past 15 years.

Undoubtedly, each has had ups and downs of its own making. Dodge & Cox Balanced stumbled badly during the financial crisis, thanks to its heavy stake in financial stocks. And portfolio manager changes are a source of uncertainty. In fact, Fidelity Puritan recently lost its lead fund manager and, next year,��Vanguard Wellington��will lose one of its lead managers, both because of retirement. Morningstar has cut its rating of Puritan to neutral, pending evaluation of new management, but has expressed more confidence in Wellington���s remaining team.

With all that, there���s a lot to recommend all six funds. Here are five reasons to consider buying a balanced fund:

The 60% stock-40% bond split, which is what these funds typically maintain, is ideal for moderate risk investors. It���s like mild salsa. In fact, it���s the industry standard for moderation: mostly stocks, to tap into the potential growth we need, but a hefty slug of bonds to limit volatility. Most investors below their 50s are advised to go heavier on stocks. But it���s also crucial to stay within your risk tolerance. That���s especially true for less-experienced investors.
While target-date retirement funds are also great choices for set-it-and-forget-it investors, they���re a different animal. The allocation to stocks declines over time, plus they often have substantial foreign exposure. With a balanced fund, you have a better idea of what you���re getting.
Even the best advice���about low-cost indexing, broad diversification, astute asset allocation, periodic rebalancing���can be a blur for beginning investors. The great investment books sometimes contradict each other on crucial issues, such as how much to invest overseas. As in other areas of our lives, we shouldn���t let the perfect be the enemy of the good. A lot of people have made a lot of money in balanced funds without knowing anything about asset class correlations or the price of shares in China.
Your 401(k) choices may be limited���but there���s a good chance one of these funds is in there. The American Balanced Fund, normally available only through financial advisors for a heavy cost, may be available without a commission in your 401(k).
I think of my mother, sitting in funds like Vanguard Wellington and American Balanced, and reinvesting her dividends and capital gains for decades. Her financial advisor was happy with such a low-maintenance client. What did Mom know about investing? Not much, except to buy and hold her balanced funds. Mom slept soundly, while I tossed and turned, worrying about whether my asset allocation was the right one.

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles for HumbleDollar include Weight Problem,��Not My Guru��and��China Syndrome. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart .

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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What Do You Mean?

WORDS AND PHRASES have a powerful impact. They motivate and mislead. They���re subject to perceptions and preconceived notions. They come and go in fashion. Whatever happened to the word ���gobbledygook���? Okay, I admit it, I���m also a fan of ���curmudgeon.���

Today, there are several words and phrases in fashion that pack an emotional punch, but sometimes they���re misunderstood or go unquestioned. When you hear the following 10 words and phrases, I���d advise you to put them under a magnifying glass:

1. Affordable. A simple word, right? But what if I added health care, as in ���affordable health care.��� You���ve heard that phrase a lot over the past decade, but have you ever seen it defined? When we buy a car, we may define affordable as the ability to make the monthly payments. But if we applied those same dollars every month to health care, the amount would likely be deemed unaffordable. Indeed, paying any amount for health care is often perceived to be too much.

2. Paycheck to paycheck. This phrase is usually preceded by the word ���living.��� Together, the words trigger empathy and paint a picture of inadequate income and struggling financially. While that may be true, we often fail to consider that���like affordable���this, too, is a relative term. In fact, it can apply at any income level: Consider the deep-in-debt Johnny Depp.

3. Earned. I hear this term a great deal in reference to Social Security. ���I earned my benefits,��� people will say. ���I paid for them.���

That���s a misconception. If it were true, your monthly Social Security checks would stop once you had been repaid all of your and your employers��� contributions, plus interest. The fact is, how much your family receives in Social Security benefits is essentially unrelated to the total taxes you paid, thanks in large part to spousal and survivor benefits.

4. Fair share.��When we were kids, we���d use this notion when divvying up candy. Now, it comes up with reference to taxes. I suspect it would be difficult to find people who think they don���t pay their fair share.

But what counts as a fair share? In 2016, the top 1% of earners paid 37.3% of income taxes, more than the bottom 90% combined. But that statistic doesn���t persuade many people���who instead point to the regressive nature of Social Security payroll taxes.

Social Security��payroll taxes are based on earnings up to the taxable wage limit, which is $132,900 in 2019. To be sure, the benefit formula also gives greater weight to lower income workers and hence provides a higher income replacement percentage. Nonetheless, a worker earning $200,000 pays a lower percentage of total income in Social Security taxes than a worker earning $30,000���and, according to many, the higher-paid worker isn���t paying his or her fair share.

5. Wealthy. Another relative term���and another notion subject to much debate. To be in the top 1% of income earners, you must make at least $421,926 a year, but that varies widely by state. In Mississippi, you need $254,362. When we use the term ���wealthy,��� we generally think of the other guy���and the other guy thinks of someone else. Yes, there���s somebody out there who thinks you���re wealthy.

6. Quality. Today, quality���like affordable���often pops up in conversations about health care. It���s a term frequently thrown about, but difficult to define. There are some frequently cited measures, like hospital infection rates and readmissions. But maybe we should also consider other data. What about the billions spent on unnecessary care or estimates that medical mistakes are the third leading cause of death in the U.S.?

7. Surplus. Once again, this seems like a straightforward term. According to the dictionary, a surplus is ���the amount that remains when use or need is satisfied.��� But when there���s talk of the Social Security surplus, what folks really mean is the reserve���money set aside because revenue at one time exceeded current payments.

Social Security, like a pension plan, has accumulated liabilities���benefits that need to be paid in the years ahead. According to the latest Social Security Trustees��� report, the unfunded liability for Social Security is $14 trillion. The current reserve, which is being depleted, holds about $2.9 trillion, or some $11 trillion less. Sorry, no surplus.

8. Equal pay.��It���s been the law for more than 50 years: No pay inequality can be tolerated based on any form of discrimination. No doubt some outright discrimination still exists.

But beyond that, it gets tricky. Do we really mean or want equal pay in the literal sense? The law permits pay differences when a merit system is used or when one person has a higher education level. But defending the accuracy, fairness and applicability of these factors in any given situation is tricky���and it often gets employers in trouble.

9. Free. A wonderful word. I have a friend in England who assures me that, once he turned age 65, his health care was free. He didn���t even have to pay premiums. When we hear the word ���free,��� we should immediately wonder: Who���s footing the bill?

10. Paid for by the government.��The government may arrange��payment. But ultimately, the money paid out comes from somewhere else. Where? More often than not, that would be you and me.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Open Season,��Straight Talk��and��Mercedes and Me.��Follow Dick on Twitter��@QuinnsComments.

Do you enjoy��reading articles by Dick and HumbleDollar’s other writers? Please support our work with a��donation.

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Don���t Want to Know

WHEN I WAS a child growing up in Ohio in the 1950s, my two best friends were Tommy and Terry. They were brothers who taught me a lot about life. When I was nine years old, they showed me how to smoke a cigarette. They also taught me what the middle finger was all about. Okay, some of this stuff wasn���t what you���d want your child to know. But they also helped me learn an important lesson about money.

One day, we were playing baseball in my parents��� backyard and we broke the next door neighbor���s basement window. Our parents decided we kids should forfeit our allowances to pay for a new window.

I was okay with that���until I found out that Tommy and Terry were getting 50 cents a week and I was only getting 25. I was livid. All of a sudden, my life was turned upside down.��Since I just broke the neighbor���s window, I didn���t feel I could ask my parents for a bigger allowance. I probably also knew trying to get a 100% raise was a nonstarter.

As a child, I never fully understood why my friends received more money. I just wished I���d never found out about it. One result: I made a concerted effort over the years to avoid knowing my coworkers��� salaries.

Many years later, however, a gentleman named Bob was hired into my department. Bob was not shy about discussing his salary with his coworkers. When people found out how much he was making, many became dismayed and angry. It got so bad that our boss had to request that our yearly performance and salary reviews take place early���ahead of the company���s scheduled date. I found out that day at work that I wasn���t the only one who is better off not knowing what his or her coworker is making.

We tend to judge how well we���re doing by using human benchmarks: the success of our coworkers, friends and family. These are people who we feel we have something in common with. We���re disappointed when our salary or net worth doesn���t match or exceed theirs.��The problem: If we think this way, we���ll always be dissatisfied with our financial life, because there will always be someone who���s doing better.

Instead, the true benchmark against which you should gauge your financial fitness is yourself. It���s how you feel about your finances that counts. If you���re living a comfortable life with no major financial issues and you���re satisfied with your salary, that should be enough���and you shouldn���t worry what your friends or coworkers have or earn.

After 40 years, I had an opportunity to talk to Tommy and Terry. Tommy went on to have a successful career. He���s now retired and spending a lot of time on the golf course. Terry, who served in Vietnam, is also enjoying retirement. We reminisced about the good and bad times we had together. But not once during our conversations did the allowance debacle enter my mind. What seemed such a big deal back then seems so insignificant today.

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 Are We There Yet,��Healthy and Wealthy��and��After You. ��Follow Dennis on Twitter��@DMFrie.

Do you enjoy the articles by Dennis and HumbleDollar’s other writers? Please support our work with a�� donation .

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Window Dressing

WE HIT��THE renovation snooze button for years. We were put off by the hassle and the expense, plus we were concerned that as little as 50% of a remodeling project���s cost ends up reflected in a home���s value���and that assumes you sell within a year. On top of that, we rented out our house for three years, making renovations difficult.

The watershed moment: My wife indicated���very firmly���that she was through putting out pots and bowls to catch all the drips inside our house every time a heavy rain occurred. Yes, it was time to replace the leaky and rotten windows.

Window replacement companies would have you think that replacing old windows is a snap. It isn���t. To replace our windows and sliding doors, we discovered that we had to carefully consider two completely different aspects of the project: the window manufacturer and the contractor. Many companies bundle these two activities. But since our house had leaks, rot and other deterioration, a simple window installer would not suffice. We needed a full-fledged contractor to fix all the related problems.

We started researching potential contractors last December. We sought estimates by February to replace 27 windows, with the hope of getting the work done in April or May. When the bids came in, they ranged from $13,000 to $85,000, with the potential for significant cost overruns, should the work prove more extensive than anticipated.

It was clear we needed to do more research.

We started digging into the window manufacturing business, analyzing quality, features, longevity, warranties, customer reviews, best match to existing windows, finishing requirements and cost tradeoffs. In essence, we needed a PhD in windows. Our research quickly eliminated two-thirds of manufacturers, as well as a couple of contractors who weren���t up to the task.

We then developed our own detailed specifications, laying out requirements for each window, as well as required finishing details for the whole job. We got rid of all the nice-to-have options to save costs. Our spec sheet was a critical step in obtaining apples-to-apples bid proposals. We gave our sheet to the remaining contractors. Then things got even more interesting.

As we worked through the process, our preferred window manufacturer���s representative strongly recommended one contractor and pooh-poohed the others. The recommended contractor just happened to be the most expensive by far.

Meanwhile, one of our contractors dropped out because he said he couldn���t obtain reasonable and firm window price quotes. In fact, three different contractors were quoted hugely different window costs���despite utilizing both our specification sheet and the same manufacturer.

By late March, we settled on a quality window manufacturer, plus a contractor who offered the best plan to manage the related repair work. The manufacturer and contractor were neither the cheapest nor the most expensive. We were set to sign the contracts when the window manufacturer���s representative indicated the final window cost would now be more than 50% higher than his most recent quote.

Granted, we had added features to a few windows. We had been assured that these options would cost only slightly more. It was a classic bait-and-switch. The representative never adequately explained how an extra layer of reflective coating���which we���d been told would run $30 per window���had doubled the cost.

We retained the contractor. But we pulled our own bait-and-switch on the manufacturer���s local rep���and utilized a more distant representative of the same manufacturer. This enabled us to get all the features we wanted and avoid roughly half of the latest cost increase, which meant a savings of some $6,000. We signed contracts in June, received the windows in late July and had them installed in August.

Did everything go exactly as planned? Absolutely not. But 10 months later, the windows are in���and we���re no longer bailing out the family room after every hard rainstorm.

John Yeigh is an engineer with an MBA in finance. He retired in 2017 after 40 years in the oil industry, where he helped negotiate financial details for multi-billion-dollar international projects. ��His previous articles include Creeping Costs,��Cashing In��and��Take It or Leave It.

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Bored Games

THERE���S AN ONLINE forum where writers of articles can request ���expert��� opinions for pieces they���re working on. Recently, a reporter was seeking recommendations for gadgets parents can buy to keep their children amused on family vacations.

Normally, I either send what I hope is a helpful reply or I move on. In this case, however, I responded���but my answer wasn���t positive.

I first railed against the idea that children needed anything beyond the trip itself, in which the parents had no doubt invested considerable time and expense. I also asked when boredom became a disease that had to be prevented, rather than an occasion for introspection or imagination.

My major concern, however, was as someone involved in financial literacy education. Buying such gadgets was a terrible economic decision, I told the writer. These electronic opiates are almost never cheap���especially knowing that what you���re buying isn���t satisfaction, but temporary placation and fleeting amusement.

The cost, however, goes way beyond money. The parents are modeling spending as a non-thinking, quick response to a perceived temporary discomfort. Many parents say they���ll teach their children responsible money management ���someday.��� But instead of taking those positive steps forward, they take far too many ���just this once��� steps backward. All the while, their children are watching and learning.

What else could be done? I suggested to the article���s author that one alternative would be for the kids to keep a journal of the trip, with the goal of recreating the vacation as a board game when the family gets home. This makes the opportunity cost of buying a gadget enormous:

The materials for a board game are cheaper.
The activity makes the kids active participants in the vacation, as they observe and take notes, rather than passive heads being ordered to look up.
Game design taps into the kids��� creative thinking. Miss a flight? Lose a turn. No line at the ride? Jump ahead.
The whole family can participate, together discussing how to gamify the day.
The eventual game becomes a better keepsake than a tacky tchotchke that gathers dust.

Best of all, the vacation doesn���t end when the family gets home. The kids will turn their notes into a game, which can then be played on a family game night. Parents can even allow kids to charge a small ���admission��� fee as they emcee the evening, showing how creativity and a bit of work can lead to a great return on investment���one that comes in the form of both fun and profit.

I���m the father of two rambunctious boys. I get it. Every parent has moments when forking over a big handful of money seems like a small price to pay to hear your own thoughts. Still, on vacation, I did the board games with my sons. Many of my students��� parents found the suggestion equally successful.

It all comes down to the example that parents choose to model. If you show your children that the top choice is to spend your way to short-term happiness, you���re setting your kids up for a lifetime of terrible spending habits. On the other hand, if you teach them to analyze a situation and find a low-cost or even investment-style solution���sacrificing a little now so you gain more later���then your children will be well-equipped for the challenges they���ll face when they travel financial roads without you.

Jim Wasserman is a former business litigation attorney who taught��economics and humanities for 20 years. His previous articles include Shame on Us,��Under Attack��and��Terms of the Trade. Jim���s three-book series on teaching behavioral economics and media literacy,���� Media, Marketing, and Me , ��is ��being published in 2019.��Jim lives in Granada, Spain, with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog on retirement, finance and living abroad at�� YourThirdLife.com.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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Peter Principles

IN THE INVESTMENT world, there���s a lot of nonsense and a lot of hot air. But a few people are like the Shakespeare of personal finance: There���s wisdom in virtually every word. Warren Buffett is probably the dean of this group. But another leading light is Peter Lynch, who in the 1970s and ’80s stewarded Fidelity Investments��� Magellan Fund with enormous success.

Lynch is largely retired today, but his plainspoken advice is as valuable as ever. Below are some ideas he shared in a recent��interview published on Fidelity���s website. This advice is especially pertinent today, with the stock market again near record highs. Lynch began with a statement about the importance of mindset:

���In the stock market, the most important organ is the stomach. It’s not the brain… Over the 13 years I ran Magellan, the market went down nine times 10% or more… It’s a question of what’s your tolerance for pain.���

Lynch makes an important point. Over the past decade, the U.S. stock market has mostly just gone higher. While this has been great for investors, it also carries great risk. Recency bias���the mind���s tendency to extrapolate recent experience���can lull us into a false sense of security. To counter this, it���s important to have an appreciation for the entirety of market history���which includes many severe downturns���and plan accordingly. This leads us to Lynch���s next point:

���You’ve got to look in the mirror every day and say: What am I going to do if the market goes down 10%? What do I do if it goes down 20%? Am I going to sell? Am I going to get out? If that’s your answer, you should consider reducing your stock holdings today.���

The S&P 500 currently stands at 2952.01���up sharply from its March 2009 low of 676.53. It isn���t inconceivable that the market might decline 10% or 20%. In fact, it did just that late last year, and the same sort of thing���or worse���could happen any time. That���s why it���s so important to try the thought experiment that Lynch recommends while the market is still high. You���d much rather reduce your stock exposure at today���s peak prices than at a much lower level. Lynch provides a further cautionary note:

���More people have lost money waiting for corrections and anticipating corrections than in the actual corrections. I mean, trying to predict market highs and lows is not productive.���

In simple terms, don���t try to time the market. If you think a portfolio change is warranted, do it today. Don���t wait. Decades of research have shown it���s futile to try to predict where the market is going next. Countless careers and fortunes have been ruined trying���and��failing���to predict the market���s next move. All you can do is respond to the facts as they are.

To be clear, I recommend selling��only if you see a need to.��While there are many reasons you might decide to sell���an upcoming expense, rebalancing or a change in your circumstances or goals���you shouldn���t sell just because you think the market is high. Remember that Alan Greenspan���s famous ���irrational exuberance��� warning came in 1996. Yes, the market did eventually drop, but the decline didn���t start until early 2000. That���s the risk Lynch is highlighting.

Lynch���s final point: You should be especially wary of making investment decisions based on economic forecasts.

���I think if you spent over 13 minutes a year on economics, you’ve wasted over 10 minutes. I mean, it’s not helpful. Everybody wants to predict the future, and I’ve tried to call the 1-800 psychic hotlines. It hasn’t helped.���

Look no further than the past 12 months to see how right Lynch is about economic forecasts. As you���ll recall, the Federal Reserve had been on a course of raising interest rates. Those moves were largely responsible for the market drop in late 2018. But then, this year, the Fed reversed course and started lowering rates again. This has helped drive the market back up. I know not a single person who predicted this seesaw. John Kenneth Galbraith, a noted economist himself, said it best: ���The only function of economic forecasting is to make astrology look respectable.���

Adam M. Grossman���s previous articles��include But Will It Work,��Staying Positive��and��Need to Know . 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 .

Do you enjoy the articles by Adam and HumbleDollar’s other writers? Please support our work with a�� donation .

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50 Shades of Risk

WHAT���S THE BIGGEST financial risk we face? Today, many folks would point to the possibility of a recession, a stock market plunge and perhaps both. Indeed, those are perennial perils���but perhaps they shouldn���t be our biggest worries. Looking to lose sleep? Here are 50 other dangers we face:

Really, really long-term��care.
Your financial advisor turns out to be a crook.
Your spouse leaves.
Double-digit inflation.
Your new neighbor specializes in personal-injury lawsuits.
Your son just got his driver���s license.
Your fellow fund shareholders panic and sell en masse.
Your employer is the 2019 version of Enron.
Social Security benefits get slashed.
Your children are ages two, three and five���and your spouse dies.
Your financial accounts are hacked and emptied.
Your home���s foundation is sinking���fast.
It turns out he wasn���t the next Warren Buffett.
Your retired parents run out of money.
Your 42-year-old is still living in the basement.
Your job can be done cheaper and faster���by someone else.
You were about to put your home on the market, but piping plovers took up residence on your front lawn.
The 4% rule doesn���t work.
When you���re out of town, your high schooler throws a wild, booze-fueled party���and somebody gets injured.
A disability prevents you from ever working again.
Congress decides to tax Roth accounts.
Your insurer jacks up premiums on your long-term-care insurance to an unaffordable��level.
You lend money to your sketchy cousin, and it seems he���s even sketchier than you thought.
Your 20-something kid gets seriously ill���and hadn���t bothered to buy health insurance.
It���s been years and your cash-value life insurance still doesn���t have much cash value.
Self-employment proves to be a bust.
Your life���s savings went into rental properties���and the properties attracted a string of deadbeat tenants.
Your child has a medical condition that means she���ll always need financial support.
The U.S. electrical grid is hacked.
Your new boss takes an instant dislike to you.
We discover the economy won���t function if everybody keeps retiring at 62.
You become a grandparent���when your daughter is 15.
You belatedly find out about your spouse���s gambling addiction.
U.S. stock prices don���t just plunge. They also stay down for three decades���just like Japan���s.
Your elderly parents are scammed out of the inheritance you were counting on.
The biggest local employer collapses���and so do local property prices.
Your father leaves everything to his children, which is when you learn you have three half-siblings.
Vanguard Group decides to become a for-profit company.
Medicare���s funding problems finally catch up with it.
Your brokerage firm has a massive computer failure���and all account records are obliterated.
It turns out Treasurys aren���t the world���s safest investment.
Your kid takes out hefty college loans���but never graduates.
The index-fund naysayers turn out to be right.
Termites, cockroaches and mice.
Your 10-year-old likes to cook���when nobody else is at home.
You should have invested in canned goods.
Your employer finds out about that thing you did in high school.
Deflation.
Your neighbors tear down their house and build a monstrosity.
That gloom-and-doom financial prophet who���s been getting it wrong for decades? He���s finally right.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include September’s Hits,��Show Me the Money, Timely Reminder and��Declaring Victory. Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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Pet Project

I���M A DOG LOVER. I���ve had four Cardigan Welsh Corgis share their lives with me. Over the past 25 years, dog food, veterinary care and training classes have consumed a large percentage of my disposable income. By necessity, I���ve learned a few simple ways to reduce the cost of pet ownership���including these five strategies:

1. Pet insurance.��One of my Corgis, Riley, needed a $5,000 orthopedic surgery when he was a puppy. Back then, pet insurance was rare, so I didn���t have coverage. To pay for his procedure, I applied for a credit card with a 12-month, interest-free grace period. I paid off the balance of Riley���s surgery just as the card reverted to a 21% interest rate.

These days, many companies offer insurance plans for pets. Owners can dictate the size of the deductible they���ll carry, as well as how much coverage they want. Virtually all pet insurance plans come with limitations on the procedures they���ll pay for, so it pays to read the policy fine print and compare coverage.

My advice: Get insurance on your pets for at least the first two years of their life. Juvenile pets are more prone to injury than their mature counterparts. Half of all bone fracture injuries in dogs occur in puppies under 12 months. Congenital conditions also frequently appear in the first year or two of life. Be aware, however, that many insurance policies limit their coverage for certain genetic conditions.

2. Buy secondhand supplies.��Craigslist and garage sales are among the best places to buy used dog supplies. Items such as dog crates, doghouses and cat towers are often available for free or at very reasonable prices. Pet beds can easily be crafted from used pillows and pillowcases. And don���t feel like you need to go into debt to keep your pet happy and entertained. There are numerous web pages explaining how to make dog and cat toys from items you may already have around the house.

3. Automate pet food deliveries.��Many online��pet retailers allow the scheduling of regular deliveries of dog and cat food. Not only is it convenient to have food delivered to your doorstep, but many companies also offer additional discounts on auto-shipped products, as well as free shipping.

4. Learn to groom your pet.��Paying for nail trimming, bathing and grooming can add hundreds of dollars a year to the cost of pet ownership. After investing in a few good tools, almost any owner can learn basic grooming techniques.

5. Keep your pet healthy.��In 2018, Americans spent more than $18 billion on veterinary care for their pets. While pet insurance can ease the financial burden, owners can take additional steps to reduce the overall cost of health care for their pet.

Many communities offer low-cost vaccinations, as well as spay and neuter clinics. Warehouse stores often sell flea and tick prevention products at significant discounts. Pharmacies will frequently fill veterinary prescriptions for less than what you���d pay at a vet���s office. Preventative care, such as keeping your pet at a healthy weight and exercising them on a regular basis, will also help to keep health care costs low.

Kristine Hayes is a departmental manager at a small, liberal arts college. Her previous articles include Educated Consumers,��Nervous Bride��and��Prime of Life. Kristine��enjoys competitive pistol shooting and hanging out with her husband and their three dogs.

Do you enjoy articles by Kristine and HumbleDollar’s other writers? Please support our work with a��donation.

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