Jonathan Clements's Blog, page 366

More to Come

SINCE ENTERING the workforce in late 2010, I���ve been giving advice to others on how to put their money to good use. There are few things I enjoy more than having a conversation with a couple about such a complex subject. Along the way, I���ve pushed myself to learn more about specific financial planning strategies, as well as about human behavior and psychology.

These readings have not only taught me how I can better help my clients, but also how I can better manage my own finances. Just because I can put together a detailed financial plan doesn���t mean I���m not subject to the same behavioral mistakes.

Indeed, I���ve learned a lot about money and human tendencies over the past decade, both from my clients and from my own journey. Here are five key takeaways from the start of my career:

Life is going to change quickly, regardless of how good your plan is. An article by FiveThirtyEight.com says Americans will move an average 11.4 times in their lifetime. I���m 31 and I’ve already lived in 11 different homes or apartments. That number is soon to increase to 12. This has taught me to get rid of old belongings, so I don���t have to move them. The frequent moves have also been a reminder that mortgage or rent take up a large portion of my budget���and I need to remain flexible in how I spend my other money.
A large cash reserve has wonderful benefits. Yes, there���s an opportunity cost to not investing your excess cash. But there is also a major advantage to having cash on hand. Thanks to my savings, I was able to start my own business. That wouldn���t have been possible if I didn���t have the liquidity to pay my bills, while I went without a salary.
Starting to invest early is easier said than done. After reading personal finance books in college, I knew I needed to start investing as soon as possible. Compound interest is a powerful thing and every year counts. I began by automatically adding $50 a month to my Roth IRA using my earnings from summer jobs. When I entered the workforce fulltime, I steadily increased my contributions. I can already see my efforts are paying off. There were plenty of ways I could���ve spent the money, instead of investing, but I���m glad I took the path I did.
My natural frugality has set a foundation for a healthy financial future. But spending money makes me happy, too. I���ve come to realize that my hobbies are expensive: golf and travel. To balance out the cost, I cut back on areas that I don���t care so much about: new cars and a new wardrobe. We never know what the future will bring, which is why I spend money on things I love today, while keeping an eye on securing the future.
Automating my investments has been a boon to my net worth. I don���t believe the markets can be beaten over the long run. What I do believe in: getting out of my own way. By setting up a diversified portfolio and automating my contributions, I can invest with less interference from my potentially damaging human behavior.

I never imagined I���d be where I am today. More change is on the horizon: In May, I���ll be getting married. I can���t begin to predict what the future may hold���but I���m making sure I���m prepared.

Ross Menke is a certified financial planner and the founder of Lyndale Financial , a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross���s previous blogs include Pass It On,��A��Great Gift��and�� Bad Timing . Follow Ross on Twitter @RossVMenke .

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Not So Easy

I RECENTLY CAME across an academic paper with an attention-grabbing title: ���It has been very easy to beat the S&P 500.��� Not just easy, but��very easy.��

That got my attention because, in recent years, beating the S&P 500 has been anything but easy. In fact, it’s been maddeningly difficult. In eight of the past 10 years, domestic markets have outperformed international markets���by a wide margin. A dollar invested 10 years ago in the S&P 500 would be worth $4.37 today. But if you had invested that same dollar in overseas markets, it would be worth barely half that.

So if there’s a simple formula to do��even better than��the S&P 500, what is it?

It turns out that this academic paper doesn’t break any new ground, but it does serve as a useful reminder that the investment world’s obsessive focus on the S&P 500 is somewhat arbitrary. Just as stocks and bonds have performed very differently, so too have different��kinds��of stocks. While there is no guarantee that the future will mirror the past, there is indeed a formula that���s demonstrated success over many years.

In fact, this formula has been understood since 1992, when two finance professors, Eugene Fama and Kenneth French, published a study on what���s now known as the ���Fama-French three-factor model.��� Their insight was both simple and profound. They found that just three factors explained a large part of the performance of stocks:

The first factor is the return of the overall market.��When the broad market is rising, most individual stocks rise along with it. And when the overall market is falling, most individual stocks fall as well. They don’t all move up and down in perfect lockstep. But in general, stocks tend to rise and fall together.

The second factor is the size of the company.��Specifically, stocks of small companies tend to outperform those of big companies. If you think about it, this makes logical sense.

Consider a company like Apple, with $250 billion in revenue. How likely is it that Apple could double in size from here? It’s possible, but hard to imagine���and it would certainly take a long time. Now consider a smaller company, one with $250 million in revenue, instead of $250 billion. How likely is it that this smaller company could double in size? It’s not guaranteed, of course, but it’s much easier to imagine. That’s the nature of smaller companies. On a percentage basis, it’s far easier for them to grow.

The third factor is valuation.��In simple terms, highflying stocks don’t fly high forever. Eventually, they lose steam, fall behind and actually��underperform over the long term.

Why does this happen? Wall Street and the media tend to focus on innovative, exciting companies���think Netflix, Tesla and Under Armour���and don’t give nearly as much attention to older, more mature companies, whose stories aren’t as exciting. The result of all that attention is that it can drive up the share prices of popular companies to unwarranted levels. This sets them up for a fall���and, when highflying stocks fall, they fall hard. Meanwhile, the more mature, more boring companies just keep doing what they’re doing, which is to generate reliable profits, leading their stocks slowly but steadily higher. And that’s why, on average and over time, boring companies with modest valuations tend to outperform exciting companies with much richer prices.

That, in short, is the formula discussed in the academic paper. And while I would never call any type of investing ���very easy,��� it has worked historically.

Since Fama and French’s original work appeared in 1992, academics have uncovered additional factors that correlate with higher stock returns. These include companies with higher profitability, upward stock price momentum and low share price volatility.

This raises a question: Should you fill your portfolio with investments tied to one or more of these factors? My answer is ���yes, but.��� Fama and French���s original paper offered simple but valuable insight. If, however, you build a portfolio that includes too many factors, you run the risk of creating an unpredictable stew. Maybe all these factors will work together in harmony. But they’re just as likely to offset each other and perhaps compound losses when the market declines. That’s why I have a simple recommendation: If you’re looking to build a portfolio, start with a total-market approach, then add only Fama and French’s two original factors, small-cap and value, and nothing else.

Is that recipe going to make it ���very easy��� to outperform? As I said, nothing is easy. Indeed, tilting toward value has hurt performance in recent years. But I do think it stacks the odds in your favor���over the long term.

Adam M. Grossman���s previous articles��include Many Happy Returns,��Oracle of Boston��and��When in Doubt . Adam is the founder of�� Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He���s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter�� @AdamMGrossman .

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Singled Out

���FINANCIAL WRITERS always seem to assume everybody���s married.��� That���s a complaint I���ve heard more than once���and it came to mind as I reviewed our 2018 tax return.

That tax return reflected the impact of 2017���s tax law, which���among other things���roughly doubled the size of the standard deduction, while capping the itemized deduction for state, local and property taxes at $10,000. One result: Many couples now get little or no tax benefit from either the mortgage interest they pay or the charitable contributions they make. But it���s a different story if you���re single, as I’ll explain in a minute.

To get a handle on what’s going on, let���s start with my wife and me. In 2017, we itemized our deductions, which came to $24,972, comfortably above 2017���s $12,700 standard deduction. But in 2018, we ended up claiming the $24,000 standard deduction, which was above our $22,865 in itemized deductions���and those itemized deductions were even lower, once the $10,000 cap on state, local and property taxes was applied.

Many couples are in a similar situation, and that���s triggered a flurry of financial advice. Experts are now encouraging folks to bunch maybe three years��� worth of charitable contributions into a single calendar year, so the sum is larger, potentially allowing them to itemize their deductions and get a tax break for their generosity. One possible strategy: Dump the big charitable contribution into a donor-advised fund, claim a deduction for that tax year and then slowly disburse the money to your favorite causes.

People have also been rethinking the value of carrying mortgage debt. Suppose you and your spouse pay $12,000 in mortgage interest each year, while also giving $3,000 to charity and claiming the maximum $10,000 deduction for state, local and property taxes. That puts your total itemized deductions at $25,000, above the $24,000 standard deduction.

But that doesn���t mean you���re getting substantial tax savings from all that mortgage interest. In fact, arguably, only $1,000 of your $25,000 in itemized deductions are generating any tax benefit���because you could have claimed the $24,000 standard deduction instead. Indeed, forking over that $12,000 in mortgage interest generated extra tax savings of just $220, assuming you���re in the 22% federal income tax bracket.

The upshot: It may make sense for you and your spouse to pay down your mortgage more quickly, especially if you are conservative investors who wouldn���t otherwise buy stocks. What about the absurd advice to ���always take out the largest mortgage possible���? It���s now even more absurd. Before 2017���s tax law, every $1 of mortgage interest might have saved you 25 cents in taxes, meaning you were still out of pocket by 75 cents���not exactly a winning proposition. Now, that $1 of mortgage interest might be costing you the full $1.

It may even make sense to sell bonds and other conservative investments, so you can take out the smallest mortgage possible. Today, a new 30-year fixed-rate mortgage might charge 4.3% in interest���and it���ll likely cost you the full 4.3%, or close to it, either because you claim the standard deduction or because your itemized deductions are barely higher. That 4.3% is more than you���re likely to make on bonds and other conservative investments, especially after paying any taxes owed on the interest you earn.

But remember, we���re talking here about married couples filing a joint tax return. What if you���re single? Please ignore everything you just read.

Imagine the same scenario described above, where you paid $12,000 in mortgage interest, gave $3,000 to charity and claimed the $10,000 maximum deduction for state, local and property taxes. Your $25,000 in itemized deductions would be comfortably above 2018���s $12,000 standard deduction for single individuals���which means your charitable contributions and mortgage interest are indeed generating significant tax savings.

That doesn���t mean you shouldn���t pay down your mortgage. I���m a fan of paying off debt, because it reduces risk in your financial life and offers a guaranteed return, equal to the loan���s interest rate. And I think almost everybody should strive to be debt-free by retirement. But for single individuals, the financial case for paying off their mortgage quickly isn���t nearly as compelling as it is for couples.

���Ah,��� you might respond. ���But I don���t file my tax return as a single individual or as a couple. Instead, I file as head of household. What about me?���

In 2018, the standard deduction for heads of household is $18,000. If your total itemized deductions are barely above that level, you aren���t getting much tax benefit from your charitable contributions and mortgage interest���and, like married couples, you may want to pay down your mortgage faster than required and bunch multiple years of charitable contributions into a single tax year.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . ��His most recent articles include On the Other Hand,��Five Crashes��and��Money Matters. Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

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Over Coffee

SITTING��IN a coffee shop, I struck up conversation with a middle-aged woman. We were talking about winning the lottery and then, as if one thought naturally followed the other, we got onto the topic of retirement. She mentioned how difficult it was for her and her husband to pay the mortgage and the monthly bills.

���After saving for retirement?����� I interjected.

���We can���t save for retirement,��� she responded. ���Our plan is to get our mortgage paid off, sell the house when we retire and invest the proceeds.���

A smart strategy? According to data from Freddie Mac and elsewhere, the price of existing homes has increased at just above the inflation rate���and that���s before maintenance costs and other expenses. By contrast, the 90-year inflation-adjusted total return for the S&P 500 is around 7%��a year.

This couple seemed to be treading water. I was thinking to myself, ���Where are you going to live once you sell your house? If you���ve never invested in the financial markets your entire life, is retirement really the time to start?���

Then the coffee shop was empty and I was left with two millennial baristas, who became the next victims of my inquiries. I started by asking, ���Were those tattoos expensive?��� I know the answer���hundreds of dollars and up���from previous investigation. But when I see tattooed young people, spending money on what���in my opinion���just messes up their bodies, I can���t help myself. My occasional follow-up question is, ���Have you thought about how that might look when you���re 65?���

But not today. Today, I was thinking about HumbleDollar stuff, so I say, ���Have you guys������actually they���re young women ages 21 and 25���”thought about saving for retirement?���

One takes the muffin from her mouth, and the other stops her pour over, and they stare at me. ���No,��� is the coordinated response.

���I���m still in college,��� 21 says.

���I have no money and six years of student loans,��� adds 25.

I���m thinking to myself, ���Be nice, don���t ask 25 why she is a barista and not in a job that might allow her to chip away at those loans.��� But as luck would have it, she gives me an opening. She says she has both a bachelor���s and master���s degree, hence the six years of loans.

���Are you going to eventually work in your degree field?��� I tread lightly.

Are you ready for this?

���I can���t,��� 25 replies. ���It requires a PhD.���

As my thoughts spin trying to comprehend what I just heard, I return to my first victim. ���Did you have any kind of financial education programs when you were in high school?��� I ask 21.

���We did.���

���Okay, do you know the difference between a stock and bond?���

She giggles and says, ���No.���

���Ever heard of compound interest?���

A moment of pondering and a head shake.

Are we at the point where we throw up our collective hands in frustration? With this lack of knowledge, is it possible for all Americans to have a retirement that���s reasonably free from financial stress?

Before you draw a conclusion about that, here���s another point of view���from a commentator on one of my blogs. It would appear that, where there���s a will, there may indeed be a way.

The comment: ���I have never earned over $60,000 in one year in my entire life.�� But I have been smart with the money I did earn. I was able to amass a nice nest egg that enabled me to retire early at age 55. And now after 11 years in comfortable retirement, my nest egg has increased.���

No planning, questionable planning, serious planning. Take your pick���and get your reward.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Get the Point,��Poor Judgment��and��How to Blow It.��Follow Dick on Twitter��@QuinnsComments.

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Unloaded

���YOU���RE FIRED��� was made famous by Donald Trump as host of The Apprentice. Imagine my surprise when my broker delivered the same message to me two years ago.

In 2015, my job was transferred to Texas. I opted to become a long-distance commuter, while my family stayed in Maryland. Around that time, we moved homes, so our son could attend a better high school. In addition, I was helping to launch two huge long-term work projects. In the midst of this, my father passed away. That meant we also needed to settle his estate, sell his car and house, and deal with my parents��� countless possessions. I inherited his financial accounts, but didn���t have time to deal with them, as our life was on overload.

Fortunately, my father���s investments were well diversified and didn���t overlap with our own portfolio. He had a broker that he especially liked. The broker was attentive, called regularly and took my father out for a couple of lunches each year. I likewise found his���now my���broker to be knowledgeable, a good communicator and likeable. Since I didn���t need to make any immediate changes to the accounts, I thought I���d give the broker a shot.

A year later, when our family life was more settled, I began to review the inherited accounts and consider how they fit with our portfolio. For example, a modest-sized IRA was invested in eight different mutual funds, which together offered excellent diversification.

I started to research the funds, which were mostly C shares, one of the three main broker-sold load fund share classes. The first thing I discovered was that the average annual management fee of the eight funds was a whopping 1.6%. The fees ranged from around 1% to more than 2%. Some of the funds had sales charges of up to 5%. Many funds had high annual turnover rates, with one fund at 74%���much more trading than I did in my own account. Finally, when analyzing each fund���s historical performance, my most disconcerting discovery was that each fund���s summary prospectus included a disclaimer to the effect, ���If sales charges were included, performance would be lower.��� Ouch.

Better informed, I rang the broker to discuss the account. The conversation went something like this:

Me: ���The IRA portfolio is 100% invested in stock funds, which is good for a deferred-tax account. In addition, it���s nicely diversified across stock sectors. Do you know how each of the eight mutual funds have been performing versus their benchmarks?���

Broker: ���I don���t know about the funds individually, but the account���s portfolio has delivered a solid 7% to 8% increase each year over the last five years or so.���

(Not mentioned: During this stretch, the S&P 500 increased something like 10% to 12% a year.)

Me: ���Yeah, that���s not bad, but I believe we should review the performance of the eight funds themselves. How do you think they have performed? For example, do you know how many of these funds might have performed better than their benchmark in at least five of the last 10 years?���

Broker: ���Sorry, I don���t know the exact answer. But if I had to guess, I would reckon perhaps half the funds beat the benchmark they are measured against over five of the last 10 years.���

Me: ���Well, I spent some time researching their performance, and discovered that not one of the eight funds beat their benchmark in five out of the last 10 years.���

Broker: ���I caution that you have to be careful in analyzing 10 years of data, which includes the 2008-09 downturn period, when essentially all funds declined. Some of these funds may have declined less than their benchmark.���

Me: ���Yes, indeed, I even accounted for the declining years and, in nearly all cases, these funds declined more than their benchmarks. In fact, I found only one fund that beat its benchmark in three out of ten years, while all the rest underperformed their benchmark in eight, nine and several of them even 10 years running.���

Broker: ���Oh���.��� (long silence)

Me: ���What might you advise would be the best way forward with these funds?���

Broker: ���You raise some interesting points about these funds, which I���ll have to look into. Please give me a few days to research them further and get back to you.���

Me: ���That would be absolutely fine. Thanks.���

The broker called me back the very next day and informed me that the account had been moved to the company���s self-directed platform, which the broker suggested would ���better serve my needs.���

I���d been fired.

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 Getting Schooled,��Bracketology��and��Don’t Concentrate.

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Castles in the Air

AMONG THE 16 million who served during the Second World War, many returned home, started families and pursued what would become an integral part of the American dream: homeownership. It���s during this time that the term ���starter home��� was coined.

My grandfather was one of those proud vets. He and my grandmother bought a place in South Dakota, where they started our family.

In 1950, the average new single-family home was 983 square feet. Fast forward to 2004 and that number had more than doubled to 2,345���a supersizing worthy of the title McMansion. My grandparents��� version of the American dream was smaller than the current iteration, and I���m confident they wouldn���t have been comfortable with today���s starter castles.

It turns out many millennials also feel that way. The millennial generation, our nation���s largest ever, has been almost 10% less likely to buy homes than Gen X and the baby boomers. While there are many responsible factors, such as a desire for urban living, rising costs and student loan debt, I submit it���s also due to a change in values.

Should millennials continue opting out of homeownership, and should older generations wish to downsize, what will the state of the resale market be? How will this impact you and your long-term goals? If I were the owner of a 3,000-square-foot house with multiple stairs to climb, I would wonder how many potential buyers there are���and what they���d be willing to pay.

Housing has become so expensive that working class families have been priced out of many of America���s biggest markets, especially urban areas on the two coasts. Indeed, the odds are, housing is your biggest expense. According to many financial experts, you shouldn���t spend more than 30% of your gross monthly income on housing. Are you?

Grandma and Grandpa were financially successful, and yet they never owned a house larger than 2,000 square feet. They didn���t like debt and they never felt they were house-poor. Take a look at your housing situation and ask yourself, ���Are you living your American dream���or someone else���s version of it?���

George Grombacher is the Chief Community Officer of Money Alignment Academy, as well as the host of the Money Savage��podcast.��He works to help people lead happier and more contented lives, with a special focus on money. George’s previous articles for HumbleDollar were Taking Advantage and��What I Value. Follow him on Twitter @GLGrombacher.

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Takes Skill

IN 2015, I was selected for the ���leadership pipeline program��� at the major bank where I worked. It was a 10-month-long program for minority employees just below executive level. We were selected to learn all about corporate culture and what it took to advance to the next level. I felt honored to be among such talented and promising employees.

Participants were from various departments from across the U.S.���technology, risk management, operations, compliance, human resources, retail banking, commercial lending and investments. The program opened with a one-week in-person training session at the bank���s corporate headquarters in Charlotte, North Carolina, followed by monthly meetings via video conferencing and online courses. Each participant was assigned a mentor from the executive level. The people I met in the program were diverse in terms of experience, education and age. We were all united, however, in wanting to learn the skills necessary to move up the corporate ladder.

Rather than particular job skills, however, a major emphasis of the program was networking. ���It���s not what you know but who you know.��� Over and over, making the right connections was emphasized. The bank encouraged us to join multiple affinity groups (Asian, veteran, Latino, Native American, women, LBGT, African American and so on), to socialize and connect across divisions and departments, and to reach out to executives. In other words, we needed to promote ourselves if we wanted to move up to the next level.

The emphasis on self-promotion as a career strategy never quite sat right with me. Partly, it���s because I���m an introvert. But mostly, I saw a problem with focusing so much on building a network. I always thought that the time and energy spent maintaining these relationships and joining the many affinity groups would, instead, be better spent learning new skills.

And there���s a big reason I felt that way: In 2007, I saw my then-employer, Countrywide, collapse. It was a turbulent and stressful time for the mortgage industry���and the financial reverberations would soon be felt across the globe. As my old company dissolved and we were integrated into a new one, I saw plenty of managers, colleagues and executives let go.

All the people retained by the company had one thing in common: They were knowledgeable, hardworking and competent at their jobs. It was the employees who had valuable skills in coding and manipulating large data sets. It was the employees who knew the operating systems so well that they could fix any problem in their sleep. I had one of these unglamorous positions���and it���s why I kept my job.

By contrast, the people let go were mostly middle and upper level managers���the people who oversaw others, but didn���t do the work themselves. I had seen so many of these managers focus heavily on networking. I witnessed them claiming the work of the people below them as their own, believing that���s what they needed to do to get ahead. They believed their web of executive contacts would support them, only to find themselves abandoned by those same tenuous connections. In lean times, everything and everyone is under scrutiny. What an institution needs is people who can keep the company going, not keep themselves connected.

The Great Recession taught me an important lesson: You need to put skills, knowledge and competency first, ahead of self-promotion and networking. The order can���t be reversed.

Jiab Wasserman recently left from her job as a financial analyst at a large bank at age 53. She’s now semi-retired. Her previous articles include Living Small,��This Old House��and��The Gift of Life.��Jiab and her husband, who also writes for HumbleDollar, currently live in Granada, Spain. They blog about downshifting, personal finance and other aspects of retirement���as well as about their experience relocating to another country���at��YourThirdLife.com.

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Pass It On

BABY BOOMERS are retiring every day and Generation X is right on their heels. With this, an increasingly large amount of wealth is making its way into IRAs and Roth IRAs, thanks to rollovers from employer retirement plans.

I���ve found that many folks don���t quite grasp the complexities of such accounts. On the surface, they seem pretty simple: You contribute to an IRA or Roth IRA, receive tax-deferred growth and then gradually withdraw the funds during retirement. Anything that���s left over after your death goes to the listed beneficiaries.

If only it were so easy. As your wealth in these accounts grows over time, you���ll want to review how your assets will be distributed after you die, so the bequests line up with your wishes. Another consideration: Different accounts and assets receive different tax treatment at your death.

As you consider your estate plan, here are four best practices for handling your IRA or Roth IRA:

Review your beneficiaries.��If you���ve designated beneficiaries on your various retirement accounts, you likely made those choices when the accounts were first opened���and never changed them. Check your beneficiary designations online or call the financial institution and ask who is listed. The beneficiaries named on your IRA or Roth IRA take precedence over the instructions in your will and any trust documents.

Consider taxes.��Who���s getting your assets, your family or a charity? If you���re planning to give to charity at your death, it should be traditional IRA dollars���those that are usually taxable when withdrawn. Why? Charities don���t pay taxes. Meanwhile, leave your family tax-free assets, like life insurance proceeds and Roth IRA dollars. This strategy will maximize the after-tax value of your estate.

Let your beneficiaries stretch.��If your heirs inherit a taxable IRA, they���ll want to let it grow tax-deferred for as long as possible. If they cash out the account entirely within a few years of your death, they could generate a lot of taxable income and bump themselves into a higher tax bracket.

What to do? Encourage your heirs to use a strategy called the stretch IRA. With the stretch, your beneficiaries can take required minimum distributions from a traditional or Roth IRA over their life expectancy, rather than being forced to empty the account within five years.

Trim your beneficiaries��� taxes.��As a retiree, you may be in a lower tax bracket than your beneficiaries, who are likely still in the workforce. By converting a traditional IRA to a Roth, you can potentially pay tax at a lower rate than your heirs would, once they inherited the account.

That said, you should be careful not to pay too much in taxes yourself. If your IRA is sizable, you will want to partially convert the account over many years, instead of all at once, so you don���t end up with too much taxable income in any one year. Not only does this keep you in a lower tax bracket, but also it���ll help hold down your Medicare premiums.

Ross Menke is a certified financial planner and the founder of Lyndale Financial , a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross���s previous blogs include A��Great Gift,�� Bad Timing ,�� Never Too Late ��and�� Head Games . Follow Ross on Twitter @RossVMenke .

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Many Happy Returns

AS THE OLD saying goes, there are lies, damned lies and statistics. And then there���s investment performance, which may deserve a category all its own.

This topic came to mind recently when I saw a press release heralding the accomplishments of a retired nonprofit executive. Among the claims: that he had doubled the organization’s endowment. This struck me as impressive���until I considered it more critically. What did it mean that he had doubled the endowment? Did it mean that he was a brilliant fundraiser? Was it the endowment manager who was brilliant? Did the executive���s tenure coincide with a bull market that would have doubled any endowment? In isolation, I realized, it was impossible to judge.

As individual investors, we are bombarded with claims about investment performance���and it can be hard to make sense of it all. To help you navigate the numbers, here���s a five-step guide to interpreting investment performance.

Step 1: Understand the sources of growth

The first step is to grasp the basic math of an investment account. It looks like this:

Beginning balance on Jan. 1
Plus increases in the value of your investments���or minus any decreases
Plus interest and dividends paid by your investments
Plus deposits
Minus withdrawals
Minus investment fees
Equals ending balance on Dec. 31

Though this won’t show up on your statement, you should also subtract the taxes generated by your investments. That���ll give you the most realistic picture of your results.

Step 2: Isolate your investment returns

Intuitively, the above formula makes sense, but it’s easy to be misled. Suppose your portfolio grew from $100,000 to $120,000 over the course of a year. On the surface, it isn’t obvious how much of that came from investment growth and how much came from your own contributions.

Of course, if you didn’t contribute anything to your account during the year, the math would be easy. You could conclude that your investments grew 20%���a great result. But suppose you made a number of additional contributions. Now it’s much more difficult to know whether or not to be happy with that $20,000 increase.

Because of that difficulty, the investment industry has developed a convention called ���time-weighted returns��� to measure performance. When a mutual fund advertises its performance, it���ll often show time-weighted returns over, say, one, three and five years.

By looking at time-weighted returns, the idea is to isolate your investment returns from the distortions caused by contributions and withdrawals, allowing you to measure your true investment performance. Whether you’re grading your own investments or evaluating a prospective investment, always look for time-weighted returns. That will allow you to make apples-to-apples comparisons.

Step 3: Put your returns in context

Once you’ve isolated your investment returns, the next step is to compare them to a relevant benchmark, such as the S&P 500 index for stocks or the Bloomberg Barclays Aggregate index for bonds. There���s nothing magical about these, or any other, benchmarks. What’s important, though, is that they provide you with a yardstick for comparison.

How should you use these yardsticks? The most important thing is to make sure you’re looking at the right benchmark. If you have a portfolio composed of domestic, large-company stocks���like Microsoft, Apple and Amazon���the S&P 500 might be the right benchmark. But if you hold small-company stocks or international stocks, or if you own a mix of stocks and bonds, then you’ll want to look at other benchmarks and probably more than one. If you’ll forgive the analogy, you can compare apples to apples, but you can’t compare an apple to an entire fruit basket. It’s best to compare each asset class to an appropriate benchmark.

If you’re evaluating a mutual fund, you want to be especially careful. The mutual fund operator will provide a benchmark, but I’ve found it’s useful to take the recommended benchmark with a grain of salt. Stand next to a tortoise, and you’ll look fast. Stand next to sprinter Usain Bolt, and the comparison will be less favorable. Fund companies sometimes like to choose the tortoise.

Step 4: Don’t forget about taxes

This is perhaps the hardest part about evaluating investment performance, but no less important. Every investment, and every investment manager, will generate some amount of tax liability���unless the investment is held in a tax-free account. Unfortunately, you won’t know this until after the fact���when your tax return is completed. Since we’re coming up on April 15, this is a good time of year to review your portfolio���s tax efficiency. Open your tax return, looking especially at Form 8949, to see if any of your holdings are generating disproportionately large tax bills.

Step 5: Take a step back

A colleague once asked, ���What in the world does the S&P 500 have to do with my financial plan?��� It was a good question. As important as it is to evaluate your investments quantitatively, you should also ask these more fundamental questions: Are my investments meeting my needs? Are they growing at a rate sufficient to help me reach my goals? Are they sufficiently stable that I can sleep at night? That, in the end, is probably the best measure of success.

Adam M. Grossman���s previous articles��include Oracle of Boston,��When in Doubt��and��Rolling the Dice . Adam is the founder of�� Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He���s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter�� @AdamMGrossman .

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On the Other Hand

YOU COULD ARGUE that U.S. stocks are reasonably priced, with the S&P 500 companies trading at 22 times their reported earnings for the past 12 months. That���s not much above the 50-year average of 19.3���and hardly outrageous, given today���s modest bond yields.

But you could also argue that U.S. shares are horribly overpriced. The S&P 500 stocks today offer a dividend yield of just 1.9%, versus a 50-year average of 2.9%. Shares also seem pricey compared to both the value of corporate assets and average company profits for the past 10 years.

What���s the truth? This past week, I updated many of the numbers in the financial markets chapter of HumbleDollar���s online money guide. Those numbers offer some perspective on today���s valuation conundrum���and on what sort of stock returns we might see in the decades ahead. Consider six points:

1. Over the past 50 years, nominal U.S. economic growth averaged 6.4% a year, per-share profits for the companies in the S&P 500 rose 6.5% and the S&P 500 climbed 6.6%, excluding dividends. Meanwhile, annual inflation ran at 4%. The simplistic explanation:�� A growing economy drove up corporate profits, which���in turn���propelled share prices higher.

2. Look more closely, however, and you might wonder why per-share corporate profits didn���t grow even faster. Over the past 50 years, after-tax company earnings received two big boosts. First, the top corporate tax rate fell from 52.8% in 1968 to 21% today. Second, the share of GDP claimed by after-tax corporate profits rose from 6.5% to 9.3%. Because of falling tax rates and rising profit margins, after-tax corporate earnings should have grown faster than GDP.

3. Why didn���t earnings grow more quickly? The twin benefits of falling taxes and rising margins were offset by dilution���one of the most insidious threats to owners of publicly traded companies. As corporations issue new shares and as new businesses emerge, existing shareholders see their claim on the economy���s profits gradually diluted. This dilution has been estimated at two percentage points a year���meaning that, if overall profits rise 6% a year, the per-share profits of publicly traded companies might climb just 4%.

4. A funny thing happened to dilution over the past decade: It disappeared, thanks to stock buybacks. For instance, during the 12 months ending September 2018, the S&P 500 companies spent $446 billion on dividends and $720 billon repurchasing their own shares. That���s more than the $1.1 trillion they reported in earnings, according to S&P Global. The sum spent on buybacks was equal to 2.9% of the S&P 500���s market value. That means the shares repurchased by companies were greater than the historical 2% dilution rate���good news for shareholders.

5. Or is it bad news? If corporations are spending more on buybacks and dividends than their reported earnings, does that mean these companies are skimping on capital spending���to the detriment of long-run earnings growth? Or do companies feel less need for capital spending, because they anticipate slower growth in the years ahead?

6. Real GDP grew an impressive 2.8% in 2018, a tad above the 50-year average of 2.7%. Last year, however, may be an aberration. GDP growth since 2000 has averaged a pedestrian 1.9%���with good reason. The economy grows as we both increase the number of workers and increase their productivity. Lately, growth in the workforce has slowed, with the millennials entering the workforce barely outnumbering the baby boomers who are retiring. The labor force is projected to grow just 0.6% a year over the decade through 2026, versus an average of almost 1.5% for the past 50 years.

Where does all this leave us? The S&P 500 companies are returning huge sums to their shareholders. It just happens that they���re doing so by buying back shares, rather than through dividends. That suggests we probably shouldn���t be alarmed by today���s modest dividend yields.

But that doesn���t mean I���m greatly comforted by today���s price-earnings ratio of ���only��� 22. Last year, the S&P 500 companies��� reported earnings surged 20%. But that entire increase can be explained by the drop in the corporate tax rate���a onetime gain that could easily be reversed. Moreover, in the decades ahead, relatively modest economic growth seems almost inevitable, given the expected sluggish growth in the workforce. The danger: Investors are disappointed by corporate earnings growth���and decide that today���s lofty stock market valuations aren���t justified.

But even with the risk of a large short-term market drop, I think stocks remain the best bet for long-term investors. U.S. shares may be richly priced. But those who diversify globally will also have cheaper markets in their portfolio. And let���s face it: With 10-year Treasury notes yielding less than 2.6%, is there any alternative to biting the bullet and buying stocks?

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . ��His most recent articles include Five Crashes,��March’s Hits, Money Matters��and��45 Steps to Success. Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

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