Jonathan Clements's Blog, page 350

Drinks on Me

MONEY WAS ALWAYS tight when I was growing up. When my brother was age 10 and I was 12, my parents boosted our modest allowance. The difference almost doubled what we were getting���but there was a catch.

Our parents felt we drank too many sodas. It was the late ’80s, so I doubt the extra sugar was their concern. Rather, it was the extra items on the grocery receipts. We were inflating the family grocery bill with our beverage consumption. Our parents upped our allowance, with the understanding that we would be responsible for buying our own soft drinks. They would still provide us with 2% milk, generic juice concentrate, sweet tea and all the tap water we could drink. But if we wanted brand-name carbonated sugar water, we���d have to buy it ourselves.

I credit this scheme with teaching me the basics of budgeting.

I learned that you could get a two-liter soda bottle on sale for 99 cents. Not only did I get to pick my poison, but also one bottle could last me all week, so I could pocket the difference if I bought just one. I started paying attention to the newspaper circulars. A trip to the grocery story was suddenly a more interesting experience.

Sales were frequent but didn���t happen every week. I learned to put aside the cash and buy in bulk when the price was best. We lived in the Midwest, with plenty of space, so I could easily store the extra. It wasn���t until much later in life that I realized that space costs money, but that���s another story.

I also discovered that sometimes cheap is no substitute. While a generic version was just fine in some cases���the aforementioned cylinder of orange juice, for example���I found that a generic cola just wouldn���t do. I liked Dr. Pepper and there wasn���t a satisfying store-brand alternative. Sometimes, I learned, it���s worth paying more for what makes you happy.

I didn���t yet know the terms ���cost-benefit analysis��� or ���opportunity cost.��� But within a few months, I realized I could live without my Dr. Pepper and my allowance could be used for other things���like the clothes I coveted as I entered my teens. I gave up sugary drinks, instead adopting a lifelong habit that has not only saved me money, but also made me healthier. I learned to like ice water.

Today, when I visit my parents, they always offer me a can of Dr. Pepper. Sometimes, I take one���and they don���t even charge me.

Tracy Bee is a higher education administrator in the Midwest. She���s an erstwhile freelance writer and a member of Gen X, with a lifelong interest in living a good life on a lean budget.

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But Will It Work?

IN RECENT WEEKS, the world met WeWork founder Adam Neumann. The meeting did not go well. WeWork had been preparing an initial public offering for its stock and things seemed on track. But the IPO was shelved and Neumann was out of a job.��

The proximate cause: A��Wall Street Journal��profile��of Neumann detailed the entrepreneur���s odd habits and fanciful notions. Among Neumann���s stated goals: to become president of the world, to earn a trillion dollars and to achieve immortality. All of that was on top of concerns about WeWork itself.

The company is a leader in the fast-growing market for co-working spaces, but it seems to be having a hard time making money. Last year, the company brought in $1.8 billion���an impressive sum���but its expenses were $3.5 billion, nearly twice its revenue. At that rate, it was difficult to see how it was ever going to become profitable.

No doubt about it: Investing in private companies���or in private companies going public���carries risk. But it also carries the potential for extraordinary gains, which is why it can be so tempting. As a general rule, I recommend sticking with simple, publicly traded investments. But if you do want to make private company investments, how can you tilt the odds in your favor? Ask lots of questions���and then ask some more. Here are topics to include in your initial due diligence:

Business model.��While every business is unique, there are really only a handful of proven business strategies out there: A company can either invent a brand new market or it can enter an existing market, either at a lower price or with a differentiated product. If you���re considering an investment in a new business, ask yourself whether it follows one of these proven strategies���or whether it���s just another undifferentiated business entering an already crowded market.

Business economics.��Most businesses incur losses in their early years, until they build up the necessary scale. In WeWork���s case, however, it already has hundreds of locations and billions in revenue, and yet it���s still incurring losses. In fact, its losses are��growing. If you���re evaluating an investment, you at least want to see the numbers heading in the right direction. If not, it���s fair to ask whether the idea is just inherently unprofitable.

Governance.��In the case of WeWork, one of the first red flags was the extraordinary degree of control exercised by Neumann. While common shareholders were entitled to one vote per share, his shares were initially slated to carry 20 votes per share. As a minority investor in any private entity, you���re always at a disadvantage, but if you see this kind of thing, it tells you a lot.

Objective.��Ask what the founder���s objectives are. Is the goal to build the company to sell it or to grow it over time, so one day it can pay dividends to its owners? Those are both valid objectives, but you want to be sure your goals are aligned with the founder���s. You also want to be sure the company���s operating agreement is fair to outside shareholders, especially if the plan is to grow the business for the long term.

Managers.��In the world of venture capital, there���s a saying: ���Bet on the jockey, not the horse.��� In other words, bet on the founder. I see the logic in this, but I would also urge caution. When it comes to charismatic entrepreneurs, it can be difficult to distinguish between a genius and a charlatan. Both can be convincing storytellers. It���s often only with the benefit of hindsight that we can tell the difference. I would pay as much attention to the business as you do to the founder.

Minimum investment.��With any business���public or private���things can go wrong. For that reason, if you���re going to get into private investments, you should diversify. Often, private investments come our way through friends and family. That���s fine. But try to have some sort of logical process, so you don���t make a small number of big bets on things that just happen to cross your desk. I would go as far as assigning an allocation to private ventures in your investment plan.

Fees.��An easy way to diversify is with an investment fund. But keep in mind that private funds differ from standard mutual funds in an important way: When you���re investing in regular mutual funds, the��research��shows that fees are a good indicator of a fund���s future performance. But when it comes to private funds, I see fees as being far less important. To be sure, private fund fees can be among the highest out there, but I still wouldn���t get hung up on that. Instead, I would spend much more time thinking through the other factors listed above.

Adam M. Grossman���s previous articles��include Staying Positive,��Need to Know��and��Passive Stampede . 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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Show Me the Money

HERE���S A SOBERING thought: Much���and perhaps most���of the money you���ll accumulate for retirement will reflect the raw dollars you sock away and not the investment returns you earn.

Consider a simple example. Let���s say retirement is 40 years away and your goal is to quit with $1 million. Let���s also assume you can earn an after-inflation ���real��� annual return of 4%, which is my best guess for the long-run return on a globally diversified, stock-heavy portfolio.

What will it take to amass that $1 million? Over the four decades, you���d need to save $10,119 a year, or almost $405,000 in total. That means that 40% of your $1 million would reflect the actual dollars you saved. And keep in mind that we���re being optimistic and assuming you salt away money at a heathy clip for your entire 40 years in the workforce.

What if you don���t get around to saving for retirement for the first 10 years of your career���perhaps a more common situation���so you only have 30 years to save for retirement? To have $1 million after three decades, you’d need to sock away $17,144 a year. That means that more than $514,000���or 51% of the final sum���was the money you saved.

What if we factor in inflation? Let���s assume inflation runs at 2% but you earn a nominal return of just above 6%, so your real return remains 4%. You sock away $17,144 in the first year, but thereafter increase the sum you save each year along with the 2% inflation rate, thereby offsetting inflation���s corrosive impact.

“Savings aren���t just a crucial contributor to your ultimate nest egg. They���re also a necessary first step: Without savings to invest, there will be no investment gains to be had.”

Result? After 30 years, you���d have $1.8 million, of which 39% was accounted for by the actual dollars you saved. That might seem more heartening, but it simply reflects the distortion caused by inflation. If we figured everything in today���s dollars, the final sum would still have $1 million in current spending power���and 51% of the sum would still reflect the raw dollars you salted away.

Moreover, the above examples likely underplay the importance of actual savings. Most folks boost the sum they save each year as they advance through their career, partly because their salary climbs in real terms and partly because they grow increasingly panicked about retirement.

What are the implications of all this? Clearly, the above examples highlight how important it is to save diligently for retirement throughout your working life. If the money you save is going to account for perhaps half of the final balance, you can���t afford to mess around. Moreover, savings aren���t just a crucial contributor to your ultimate nest egg. They���re also a necessary first step: Without savings to invest, there will be no investment gains to be had.

That brings us to a perverse conclusion���one I���m almost reluctant to mention: Because savings are so crucial, and because they���re the key driver of your ultimate nest egg, how you invest is somewhat less important.

Take the second example above, where you saved $17,144 a year for 30 years, earned a 4% real rate of return and ended up with $1 million. What if you were more aggressive by, say, allocating more to small-company stocks and emerging markets, and you managed to earn a 4.5% real rate of return? That only boosts the final number to $1,093,000. What if you kept more in bonds and earned a 3.5% real rate of return? After three decades, you���d still have $916,000.

That said, lackluster performance could have a very real cost. Let���s assume you have your heart set on that $1 million, which you could amass if you saved $17,144 a year for 30 years, notched a 4% after-inflation annual return and invested in low-cost market-tracking index funds.

But instead, you roll the dice on actively managed funds and individual stocks, and you end up earning a 3% real annual return. That’s entirely possible, given the hefty investment costs and added risk involved in actively managing a portfolio. To make up for that lower return and still retire with $1 million, you���d need to crank up your annual savings over the 30 years to $20,407, or 19% more.

Don���t like the sound of that? Instead, you might save $17,144 a year���but, to have your $1 million, you���d need to tough it out in the workforce for an additional three years and seven months. Don���t like the sound of that, either? I didn���t think so���which is why you should probably stick with index funds.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Timely Reminder,��Declaring Victory��and��User’s Manual. 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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How Low? Too Low

IT���S WIDELY assumed that the Federal Reserve, our nation���s central bank, has two mandates: maximum employment and stable prices. But a closer look at the Federal Reserve Act of 1977 on the Federal Reserve���s very own website reveals a third mandate, namely ���moderate long-term interest rates.���

Does a 1.7% yield on 10-year Treasurys and 2.15% on 30-year Treasurys count as ���moderate long-term interest rates���? Since I have nothing better to do on the weekend, I headed to the Federal Reserve Bank of St. Louis���s website to see what the average long-term yields have been since the Federal Reserve Act of 1977 passed. The answer: 6.2% for the 10-year Treasury and 6.75% for the 30-year Treasury.

The Federal Reserve is doing much better on the employment front, with the unemployment rate hovering around 3.7% lately. And it certainly seems like prices are stable, with both the Fed���s favorite inflation metric and inflation expectations hovering around 1.6%. I guess two out of three isn���t bad.

But getting back to the Fed���s third mandate: Is it really a mandate and, if so, does it really matter? To answer the first question, I consulted Prof. Google. I typed ���Federal Reserve and moderate long-term interest rates��� into the search box. The top five search results linked to official Federal Reserve websites. A site run by the Federal Reserve Bank of Richmond tersely states: ���The third goal���’moderate long-term interest rates������is often not explicitly discussed.��� According to the Federal Reserve Bank of San Francisco, ���These dual policy goals [maximum employment and low stable inflation] imply moderate long-term interest rates.��� Talk about a non-mandate mandate.

It���s worth noting that the Fed has much less control over long-term interest rates than short-term rates, hence the predictive power of the yield curve. If so, why include the third mandate in the 1977 Federal Reserve Act? I suspect it was included because the 1970s were a period when inflation began to spiral out of control. This led to very high interest rates, with the 30-year Treasury eventually peaking at 15% in 1981.

If inflation and inflation expectations are under control, as they have been for decades, long-term interest rates will likely be contained. But what about excessively low long-term rates? Does the Fed have a duty to prevent long-term interest rates from getting too low?

Based on the actions of the Federal Reserve in recent years, the answer is an unequivocal ���no.��� The post-Great Recession quantitative easing and zero interest rate policy took aim not just at short-term rates, but also at long-term rates, dragging both lower. As recently as 2016, Ben Bernanke discussed the explicit targeting of long-term rates as a viable tool for the Fed. With a recession on the horizon and interest rates already so low, it���s certainly possible���and maybe even probable���that long-term interest rates will soon be targeted again and pushed even lower, perhaps to zero or below, with the goal of spurring economic growth.

Even if the Fed cared about its third mandate, the Fed does not operate in a vacuum. Interest rates in most other developed economies are even lower than ours. Do ultra-low interest rates across the U.S. yield curve, and negative interest rates across Europe and Japan, even matter? Doesn���t this make our burgeoning debt���sovereign, corporate and consumer���much more manageable? Aren���t lower interest rates on mortgages a win-win for consumers? Fun fact: Mortgage rates in Denmark are already negative.

Whenever something has been dormant for an eternity, it���s natural to assume it is dead. Inflation was conquered by Fed Chairman Paul Volcker in the 1980s and has been hibernating ever since. Bloomberg recently declared the death of inflation. The Fed seems obsessed with raising inflation to its 2% target, something I���ve never quite understood. Wouldn���t 1% inflation be even better than 2%?

Intent on raising inflation from the dead and stimulating the economy, central banks around the world are using more and more unconventional methods to depress rates further into negative territory. Previously the specter of inflation would have given them pause. But inflation is dead, right?

Very smart people can���t seem to agree whether we���re in a stock market bubble or a bond market bubble or perhaps a real estate bubble. It���s my belief that they���re all correct. But I���d argue the real bubble is in interest rates. Financial assets are priced according to so-called present value���the value, in today���s dollars, that we put on investment earnings we expect to receive in the future. When interest rates are depressed, present values���and hence the price of financial assets���are elevated. In other words, if we can���t earn much interest by buying bonds, a stream of future stock market dividends seems that much more valuable.

Persistently cheap money, in the form of ultra-low interest rates, leads to many unintended consequences, one of which could be the resurrection of inflation. That may seem unlikely today. But remember, what���s dormant isn���t dead���and renewed inflation could eventually lead to far higher interest rates and much lower stock prices.

John Lim is a physician who is working on a finance book geared toward children. His previous articles include Solomon on Money,��Out on a Lim��and��My Sentence . Follow John on Twitter @JohnTLim .

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Straight Talk

TAKE ANY MONEY issue and you���re sure to find detailed guidance���some so complicated that it���s largely ignored, regardless of its potential benefit.

The following is not intended to make light of the difficulty some people have with money. Still, a little straightforward information helps. Let���s strip personal finance down to its basics:

1. ���I can���t afford to save.��� It���s easy: Put savings first, and then figure out what you can and can���t afford.

2. ���Where do I invest my money?�����Low-cost stock index mutual funds. Start mixing in some bond funds as you close in on retirement. Also check out the target-date funds you���ll probably find in your 401(k) plan. If you���re a tad more of a risk taker, buy a few stocks with good dividend-paying records and build an income stream.

3. ���I don���t make enough money.�����Look for a better job, up your skills, get a second job, start a small side business, work overtime. Perhaps even collect scrap metal with that F-150 you just had to have. Yup, I���m being sarcastic.

4. ���How much can I withdraw from retirement savings before retirement?�����Do you mean how much should��you withdraw? That money isn���t an emergency or vacation fund. It���s for retirement.

5. ���I don���t know what to expect from Social Security.��� Why not? Go to the Social Security website and run an estimate.

6. ���How do I avoid running out of money in retirement?�����Start with sufficient savings. Live within your means after you retire. Having zero debt upon retirement isn���t a bad idea, either.

7. ���How do I calculate what to take from retirement funds?�����Well, there���s the 4% guideline, which says start by taking 4% of your retirement assets in the first year of retirement and thereafter increase that amount by inflation each year.

8. ���How much money will I need for retirement?�����It isn���t $1 million, $2 million or $5 million. It isn���t any number someone else can give you. It���s about 25 times the amount of money you��need each year from your portfolio to live the way you want in retirement. Don���t forget to consider what Social Security will also provide.

9. ���When should I start taking Social Security?�����When you absolutely need the money to live on. That may mean age 62 or 70, or somewhere in between. Don���t take it simply because you can or because you think it won���t be there for you later. Remember, when you���re 75 or 80, the highest possible Social Security benefit may come in handy.

10. ���What do I do if the stock market takes a big tumble?�����Nothing, except keep up your periodic investing. It isn���t a disaster, it���s an opportunity. It���s also why you minimize risk when you���re close to retirement by diversifying into non-stock investments.

11. ���How much will Medicare cost me?�����The basic monthly individual Medicare Part B premium is projected to be some $144 in 2020, a $9 increase. Individuals with incomes of $85,000 or more will see increases of about $25 to $30 per month. You can find the premium schedule on CMS.gov. A Part D prescription drug plan will cost most people about $30 a month in 2020. But like Medicare Part B, it���s based on income.

12. ���Is Medicare all I need?�����Probably not. Medicare has deductibles and copays, plus there���s no out-of-pocket limit. Most people have some form of supplemental Medigap coverage. Only 23% don���t.

13. ���I heard some guy harping on about an emergency fund in retirement. What gives?�����That would be me. Here���s the deal: You have $800,000 in your retirement fund and you expect to use $32,000 a year to live. Next month, your car dies or your roof needs replacing. Take that money from your nest egg and your retirement income plan is kaput. Need I say more?

14. ���I say we don���t need life insurance when we retire. My spouse disagrees. What do I do?��� Simple. If you have folks dependent on you for support, how will you provide for them upon your demise? You might do so with life insurance, a survivor annuity or lots of savings, or some combination thereof. If a married couple makes it to age 65, there���s a 45% chance one of them will reach 90.

15. ���I don���t have much, so I don���t need a will, right?�����Wrong. The fact is, you need a will and maybe a living trust. Those beneficiary designations you may have made are crucial, but not sufficient.

16. ���Is giving up my daily latte really going to help me in retirement?�����Not by itself. Rather, it���s all about your spending mindset. My simple formula is save, don���t charge to a credit card what you can���t repay in full each month, and then spend as you like.

17. ���What���s the big deal with compound interest?�����The big deal is you make money on the money you previously made, and the whole thing snowballs over time. Say you���re 25 and you invest $1,000, earning an average annual return of 7% between now and 65. That���ll give you $14,974���and you didn���t lift a finger to earn it.

18. ���My wife and I are considering moving to the Island of Wheretheheckarewe. They say living there is so much cheaper. Does it sound like a good move?�����If moving to a lower cost location is necessary to retire, you may have missed a few planning steps.

Consider a few questions. Could you afford to move back if needed or desired? How���s the health care? Remember, there���s no Medicare outside the U.S. What will you do with your time? How does your family feel about the move? Will you have funds to visit home? Is your spouse or partner truly on board with this idea?

19. ���I���m not going to retire, or at least not until around age 75, so why should I worry about all this planning and saving?�����Because you may not have a choice. A layoff, deteriorating health and caregiver duties could all get in the way. Or you may later change your mind and decide you���d like to retire earlier. Don���t get me wrong: If you enjoy working and figure out a way to never stop, best of luck to you.

20. ���Okay, I���ve got it. Now what do I do?��� You plan. You may want to talk to an advisor to guide you. Get your head out of the sand. You can���t go through your working life and suddenly decide at age 50 that you need to think about retirement. You reap what you sow, to paraphrase Paul. Think about the negative things that could happen in your life and strive to minimize those risks. In other words, think about the ���what ifs?���

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Mercedes and Me,��Leaves Me Cold��and Sharing the Wealth.��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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End Game

WHENEVER I TELL people I���m an actuary, I often get the same response: ���So you���re the guy who can tell me when I���ll die.��� It was funny the first couple of times I heard it, but less so a few dozen occasions later.

Still, the comment is a good reminder of a key statistics principle: Probabilities work well for large groups, but are less useful for smaller sample sizes. Statistics help actuaries predict the number of deaths for a large population. But it���s virtually impossible to predict which specific individuals will die.

Why is this relevant to personal finance? The principle also extends to one of the key inputs that drives our financial planning: expected lifespan. When projecting retirement income needs, I���ve often seen people simply plan for a 20-year time frame, because a healthy 65-year-old has a median life expectancy of about 20 years.

Problem is, there���s the potential to live much longer, particularly if you���re a healthy woman. According to the Social Security Administration, a healthy 65-year-old woman today has a 20% chance of living past age 95 and a 6% chance of living past 100. And if you���re planning for a couple, the probabilities that one person lives to these ages is even higher.

As someone who���s been around probabilities my entire working life, these numbers sound pretty high. How many people would fly if every plane had a 6% chance of crashing? In retirement, you have just one chance to be successful. How do you plan for this uncertainty, while still being able to enjoy your retirement savings in the meantime?

To be clear, I���m not saying ignore median life expectancies. They���re a great starting point for planning. But also consider incorporating the following notions:

Identify the extreme scenarios. When there���s uncertainty, it���s always important to look beyond expected results and review multiple scenarios, including extreme situations. In the case of longevity, ponder scenarios where you live to age 90 or 100, and perhaps even 110.

Quantify your exposures. Assuming you were to live to 90 or 105, how would you fund your living expenses? Would you be financially ruined or would your current plan get you through? Are there risks that you can���t control���such as stock market returns or health care expenses���that could impact your ability to cope with these scenarios?

I wouldn���t try to model things down to the penny. But having a general sense of which scenarios hurt you, and which you can ignore, is helpful for the next step of our process. For example, you might realize you���re in pretty good shape even if you live to 95, but living to 100 or beyond could be a big problem.

Reduce your risk. Once you���ve identified the scenarios you���re concerned about, don���t just accept them and hope for the best. While it may not be practical to eliminate all the risks associated with the extreme scenarios, there may be ways to reduce those risks to a point you���re comfortable with.

For instance, if your concern is living past 90, you might modestly increase your stock allocation to increase your portfolio���s expected return, delay Social Security to increase future income and decrease current spending to make your money last longer. All these things would reduce the financial impact of living beyond 90 without materially hurting your quality of life today.

Other options including delaying retirement a few years or working a part-time job after retirement. Yet another strategy might be to buy a deeply deferred annuity that doesn���t start payments until age 90. A 65-year-old man investing $100,000 today could receive approximately $65,000 of annual income for life starting at age 90. The guaranteed income might not cover all your spending needs at 90. But it might be enough of a floor on your income to give you comfort that, if you did indeed live that long, you���d be able to handle the financial burden.

Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for income annuities, long-term-care insurance and other insurance products. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous articles for HumbleDollar were Policy Decisions,��Works If You Can’t and��Bet Your Life. Dennis can be reached via LinkedIn��or��at dennis@saturdayinsurance.com.

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Marrying Money

IN THE RUNUP to our marriage, everyone had advice for us���on everything from communication to sex to our finances. But some of the best advice we received came from a church leader my husband had known for years. He gave us a list of topics to discuss. These discussions resulted in some financials wins, while the conversations we avoided led to struggles.

Needs vs. wants. My husband and I each made a list of what we considered to be our needs and wants. Food and a place to live were needs, while eating out and going to the movies were wants. After we each made our lists, we compared them and then combined our lists. Luckily, we were already pretty much aligned in our needs and wants, but it helped us to have a greater understanding of what each of us valued. After that, we ranked our wants according to which were most important to us.

The win:�� We know what our needs are and what wants are most valuable to us. Travel comes first among our wants. That has helped us to set�� priorities.�� We know which other ���wants��� we should spend less on, so we can afford to travel.

Debt. We also discussed our expectations regarding debt and what we were okay going into debt for. When I was growing up, debt was seen as something terrible and to be avoided at all costs, except when purchasing real estate and cars. We always paid cash for everything else. My parents never used credit cards growing up. In fact, if they mentioned credit cards, they always immediately connected them to debt.

By contrast, my husband grew up in a family that used credit cards (gasp) and understood that there were some things that it was okay to go into debt for, as long as you knew you could pay the money back. Bringing these ideas together triggered a lot of discussion, as we figured out how we would handle our own finances going forward.

Today, we use credit cards to do most of our grocery shopping and for other essential payments, but we always pay off the balance each month. If there���s something that we need to take out a loan for, we sit down and discuss how the loan payments will fit into our budget and how soon we can pay the debt off.

For instance, for my husband���s masters of accounting program, we had to take out a student loan���the first either of us had ever taken out. It took a lot of discussion and research to find which payment plan would work best for us, based on interest rates and grace periods offered.

The win:�� While we still have the education debt, we���ll be able to pay it back quickly. We���re also on the same page regarding how we pay for day-to-day purchases, so we don���t end up with any more debt.

Insurance. We didn���t discuss were what types of insurance we would need or when we should get coverage. As both of us were under age 26 when we married, we were still on our parents��� health insurance. Neither of us had fulltime jobs with benefits, because we were both in college. When my husband���s family kicked him off their health insurance, we were at a loss as to what to do.

We had a similar experience with life insurance. My husband���s part-time job started offering no-exam life insurance policies���rarely the best option for young adults in good health. My husband quickly signed up for a policy for each of us, without any discussion of which policies would work best for our situation. Since then, we���ve done more research comparing policies and found better coverage.

The struggle: We had to make some spur-of-the-moment decisions about health and life insurance that we weren���t ready for���and we would have fared better if we���d discussed them ahead of time.��

Investments. Growing up, my parents didn���t talk about investing. While I had taken a class on stocks and bonds, I always assumed that investing was something you did when you were older and had plenty of money. My husband, however, has been a finance geek for years and loves following the stock market.

When we both started working after college and making money, he asked me if it was okay if he invested in some stocks. I said ���sure,��� and that was our whole conversation. Several weeks later, my husband was telling me about how our stocks were doing, and I realized I had no idea how much he had invested or what he had invested in. This led to panic, arguments and long discussions about what our expectations were for our investments���something I wish we had done in the beginning.

The struggle: We both had different expectations regarding our investments, which caused us to have a lot of disagreements.

Money talks can be intimidating, especially when you���re getting into a serious relationship. You want to impress your significant other, not get bogged down with budgets and other financial minutiae. But these conversations���however awkward���are crucial to your success together.

Kendra Madsen is a freelance writer who loves healthy living, the outdoors and obsessing over plants. When she isn���t writing, Kendra can be found exploring the mountains with her puppy or curled up at home with a good book. Follow her on Twitter��@KendraMadsen2.

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Weight Problem

MICHAEL BURRY waited years to be rewarded for his bet against subprime mortgages. Actor Christian Bale, in the movie version of Michael Lewis���s book, The Big Short, portrays Burry curled up in the fetal position on the floor of his office. When the financial crisis finally hit in 2008, he made $100 million.

I���m no Michael Burry and the chance I���ll ever see $100 million is about 100 million to one. But I know what it���s like to bet against the market and wait vainly to be rewarded for it.

Now, Burry sees a bubble in��market cap. He says the obliteration of active management by indexing has caused large-cap companies to become overvalued and small-cap value stocks to become, well, smaller and more undervalued.

In this case, I can truthfully say I���m years ahead of Michael Burry, because I���ve long worried that large-company stocks are overvalued, especially the popular growth stocks. It���s not like I���m a genius���just a worrier who fancies himself a contrarian. Friends call me more of a contrarian indicator, which���sadly���the record confirms. Still, to use a phrase popular with our president, ���many people are saying������especially those with a stake in selling smart beta ETFs���that the biggest-cap stocks are headed for trouble.

Traditional index funds weight stocks according to their total stock market value, so the bigger a company, the more the funds have to invest. By contrast, smart beta, or factor investing, involves weighting stocks by fundamental characteristics such as corporate profits and dividends, or equal weighting stocks in an index, or simply overweighting small-cap stocks. The argument is seductive. Results have been mixed.

Nothing boosts the ego like knowing something the crowd doesn���t. Truth be told, it boosts our ego just to think��we know more than everyone else. It���s gratifying until the market doesn���t cooperate. Let me recount two unsuccessful ways I have bet against market cap:

Icahn Enterprises (symbol: IEP), which I bought on Dec. 31, 2014. I was half sold on indexing. Few people could beat the market. But Carl Icahn had been an exception, hadn���t he? The market clearly was overvalued (in my beautiful mind) and here was a chance to put my money with a value-investing legend. Result : Vanguard 500 Index Fund +59%, IEP +16%.
Third Point Offshore (TPNTF), which I purchased on April 1, 2016. I read in Barron���s about a way to invest with billionaire Dan Loeb. As with Icahn, I felt that activist investors would have an edge. They���re the true opposite of passive investors���not just picking stocks, but actively shaking up management to create shareholder value. Result : Vanguard 500 Index Fund +54%, TPNTF +7%.

Reversion to the mean���the tendency of observed data, such as the investment returns of market-beating money managers, to gravitate toward average���can be just plain mean. I could also go on about my smart beta incursions into emerging markets in 2014, but suffice it to say that small-cap, high-dividend stocks aren���t going to save you when the whole asset class sucks. Currently, I distrust��China’s market weight in the emerging market indexes���a clear signal, according to my friends, that you should load up on Direxion Daily CSI 300 China A Share Bull 2X Shares.

Someday, Icahn and Loeb may have the last laugh. IEP, at least, has gained ground in recent years against the S&P 500. I���m still holding both stocks, despite firing myself as a portfolio manager and moving the vast majority of my investments to target-date retirement funds.

I���m not hanging on to avoid admitting a mistake. Rather, I am trying to think long-term and wait for the tables to turn. At least that���s what I tell myself. It���s the old Wall Street saw: I wasn���t wrong, just early.

But the dates on my target-date funds keep getting closer. And yet my belief in my own perspicacity���and in the ability of investment legends like Icahn and Loeb to beat the market���keeps delaying my own retirement.

Related: Adam Grossman on Michael Burry

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles for HumbleDollar include Not My Guru,��China Syndrome��and��Before the Fall. 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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Staying Positive

PRESIDENT TRUMP recently criticized��the Federal Reserve���yet again. Calling Fed Chair Jerome Powell and his colleagues ���boneheads,��� the president expressed frustration that they haven’t done more to lower interest rates. Specifically, the president said we should, ���get our interest rates down to ZERO, or less.��� That last part������or less������was key. Not only should rates be lower, he argued, but they should be��below zero, as they have been in Europe.

Last week, the Fed did indeed cut short-term interest rates���by 0.25 percentage point. Still, so far, the Fed has resisted pressure from the White House and is holding its target interest rate well��above��zero. I hope they continue to do so. While I understand the president���s perspective���as a borrower, the Federal government would benefit from lower rates���I see at least 10 ways that negative rates would hurt our economy and investors over the long term.

1. Low rates punish retirees.��Consider what life looks like today for a retiree in Europe. In Germany, 10-year government bonds are now paying��–0.5%. Translation: Instead of��earning��interest when you buy a bond, you have to��pay the government��to take your money. It���s completely upside down.

2. Excessively low rates cause investors to reach for yield.��With rates on high-quality government and corporate bonds providing paltry income, many people throw caution aside and purchase lower-quality bonds. Why? Because that���s the only way to earn a higher rate. But this is dangerous. Low-rated bonds carry low ratings for a reason: They���re riskier. If U.S. rates went negative, the result would be even more investors facing this uncomfortable choice.

3. In our country, savings rates��are already too low.��Negative interest rates would further dissuade folks from saving. In fact, negative rates would effectively become a wealth tax. Think about it this way: If the government sells you a bond for $1,000 but pays you back just $995, that is a mechanism for taxing people���s savings. This concept is well understood among economists.��First proposed in the 1890s��by German economist Silvio Gesell, negative interest rates are a mechanism to discourage saving and encourage spending. That might be a good idea during a recession, but it’s not what we need today.

4. Negative rates would allow the government to become even more indebted.��The U.S. government���s indebtedness is already near��historic highs. While there are some who argue that government debt doesn���t matter, I find that notion illogical. Even if rates are slightly negative, eventually the government would need to pay bondholders back. In other words, it isn���t the interest rate that���s the problem, it���s the bonds��� principal value���the amount that needs to be repaid when the bonds mature. As a U.S. taxpayer, this should concern you, since there are only two ways to get ourselves out of debt: higher inflation or higher taxes. Neither would be good for investors.

5. Ultra-low rates enable highly indebted companies to continue borrowing.��According to a��Bank of America��analysis, low rates have created a large and growing class of ���zombie��� companies that are living on borrowed money. Eventually, if rates rise, some of these zombies will sink into bankruptcy, taking their employees and creditors with them. Negative rates would further fuel this trend, making the eventual crash even worse.

6. Low rates incentivize consumers to take on more debt. After the 2008-09 recession, consumer indebtedness declined. In recent years, however, it���s climbed back up. Unfortunately, consumers are now struggling to service this debt. Delinquencies��are��rising, suggesting a growing number of people are in a precarious financial position. What���s fueling this debt binge? Low rates. If rates go lower, it���ll only get worse.

7. Low rates artificially inflate the stock market.��There���s an inverse relationship between interest rates and stock prices. The lower rates go, the higher share prices climb, and vice versa. This happens for a variety of reasons.

For instance, consider what it means for corporate debt���and specifically for Apple, which carries more than��$100 billion��in debt. If rates were to drop by 1%, that would lower Apple���s financing costs by $1 billion a year. All else being equal, that $1 billion in savings would benefit stockholders. While this is great in the short term, rates will inevitably have to rise and, when they do, it���ll take the air out of share prices. In fact, the proximate cause of 2018���s fourth quarter stock-market tumble was rising rates.

8. Inflation.��Just as low rates artificially prop up the stock market, they can also drive up inflation. When rates are lower, companies hire more people at higher wages and those employees then spend more. These are precisely the ingredients for higher prices. In recent years, inflation has been benign. But anyone who lived through the 1970s can tell you what a corrosive effect inflation can have when it���s at higher levels.

9. The Fed���s ability to lower interest rates is a key tool for lifting the economy out of recession.��When the economy sours, the Fed lowers rates, putting money in people���s pockets to get things moving again. But if rates are already low while the economy is strong���which it is���that will deprive the Fed of a key tool, should growth later weaken. In colloquial terms, the Fed will be out of bullets. That���s not a good thing.

10. Low rates hurt banks.��If you have money in a savings account, you know how banks make money. They pay you nearly zero to hold your savings. Meanwhile, they lend out that money at much higher rates to other people. What happens when interest rates come down? Banks have to lower their lending rates to stay competitive. But when deposit rates are already near zero, they can’t go any lower.

Result: Banks can’t earn as much of a profit on the “spread” between those two rates. While you may not have much sympathy for banks, it���s nonetheless important for everyone that our banks remain strong. Look no further than��2008��to find out who picks up the tab when banks fail.

Adam M. Grossman���s previous articles��include Need to Know,��Passive Stampede��and��Adding Value . 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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Timely Reminder

PAST PERFORMANCE is no guarantee of future results. But we keep hoping.

Over the 10 years through August 2009, the large-cap stocks in the S&P 500 shed an average 0.8% a year, even with dividends included. Meanwhile, U.S. value stocks beat U.S growth stocks, smaller-cap U.S. shares notched 5.5% a year, developed foreign stock markets 2.7% and emerging markets 10.4%.

Fast forward one decade, and the leaders have become laggards and vice versa. Over the 10 years through August 2019, the S&P 500 skyrocketed 13.5% a year, smaller U.S. stocks 12.7%, developed foreign markets 5% and emerging markets 4.1%. And���just to complete the role reversal���U.S. growth stocks have handily outpaced U.S. value.

What does the next decade hold? Beats me. It���s why I favor owning a globally diversified stock portfolio���and why I cringe when I hear investors say that value investing is dead, or they own only U.S. stocks, or bonds don���t make sense at today���s yields, or emerging markets are too risky.

Indeed, I���m baffled by the confidence of these investors, which seems to rest largely or entirely on taking the immediate past and extrapolating it into the future. By contrast, I���ve been at this for 34 years, and my confidence in investment predictions���whether they���re mine or somebody else���s���has never been lower. It took a few decades, but any sense of prescience I once had has now been thoroughly vanquished by countless failed forecasts. We may only have one past, but there are all kinds of possible futures, and I have no clue which one we���re going to get.

That said, these self-confident investors could be right���and, even if they aren���t, they should fare just fine if they hang on for long enough. With the glaring exception of Japanese stocks, recent history suggests that any reasonably diversified, reasonably low-cost bet on a major market segment should pan out nicely if we stick with it for 30 years.

But those words are much easier to write than live. Today���s second-guessing of emerging markets, value stocks and other market segments is a reminder of how much our thinking is hostage to short-term market performance. Our investment time horizon may be 30 years���and perhaps far longer, especially once we figure in our heirs���but our emotional time horizon is often more like 30 days, and even that estimate may be generous.

Indeed, if we own any major market segment for 30 years���whether it���s blue-chip U.S. shares, smaller U.S. companies or foreign stocks���we���ll likely suffer a 10-year stretch when returns are mediocre or worse. If that one market segment is our only portfolio holding, it���ll take great emotional fortitude to stick with it. Most folks simply aren���t that resilient.

That���s why we should build globally diversified stock portfolios, and also throw in at least a small helping of bonds. Diversification isn���t just a defense against our own lack of clairvoyance. It���s also a way to buy ourselves a little more patience, so we���re more likely to stick with the laggards���and be there to make money when they finally return to favor.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Declaring Victory,��User’s Manual��and��Just Asking. 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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