Jonathan Clements's Blog, page 374

Newsletter No. 42

THERE ARE almost 139 million houses and apartments in the U.S. Based on the reader reaction I’ve received over the years, that’s probably also a pretty good estimate of how many people have strong opinions about the virtues of homeownership, or the lack thereof. It seems real estate discussions almost always deteriorate into debates driven by anecdotal evidence.

But what if we set aside the stories, and focus instead on statistics and commonsense? That’s what I try to do in HumbleDollar’s latest newsletter, where I offer my 13 rules for real estate. The newsletter also includes our usual list of the dozen blog posts run in the two weeks since our last newsletter.

Follow Jonathan on Twitter��@ClementsMoney��and on Facebook.��His recent articles include Price Still Slight and��Choosing Our Future. Jonathan’s��latest book:��From Here to��Financial��Happiness.

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House Rules

FOLKS USED to say, ���You can���t go wrong with real estate.��� They sure don���t say that anymore. It���s been a rollercoaster dozen years for home prices���and some experts think another rough patch is in the offing.

Since mid-2006, the S&P CoreLogic Case-Shiller U.S. National Home Price Index first tumbled 27.4% and then bounced back 53.6%, for a cumulative 12-plus year gain of 11.5%, equal to 0.9% a year. Could we be facing another dip? According to the National Association of Realtors, home sales fell 10% over the past year, in part because of rising mortgage rates. That���s worrisome: Slowing home sales often precede a fall in house prices.

But my goal here isn���t to scare away potential home buyers. Quite the opposite: I think everybody should strive to become a homeowner���but they should do so with their eyes wide open.

What do I mean by that? Real estate discussions almost invariably fall hostage to anecdotal evidence. We all know folks who supposedly made a mint in real estate, as well as people who lost their shirt. But forget the anecdotal evidence, and instead focus on statistics and commonsense. To that end, here are my 13 rules for real estate:

1. Homeownership isn���t as safe as it feels. A house is a big, leveraged, undiversified bet���arguably riskier than owning a diversified stock portfolio. Yet it doesn���t feel that way. Why not? Partly, it���s familiarity. We look around our house and see the value that���s there. And partly, it���s a money illusion. If we got daily updates on our home���s value, like we do on our stock portfolio, we wouldn���t be nearly so sanguine about our huge real estate wager.

2. We shouldn���t buy unless we can see staying put for at least five years���and preferably seven years or longer. Buying and especially selling real estate involves steep transaction costs, and we need many years of price appreciation to overcome that hit.

3. Over the long haul, home prices nationwide should rise roughly in line with per-capita GDP. Why per-capita GDP? That���s a gauge of our ability to pay. Sure enough, over the past 40 years, per-capita GDP has climbed 4.5% a year���and home prices are up 4.3%, according to Freddie Mac. Meanwhile, inflation clocked 3.4% annually.

Obviously, we���ll get years when home prices climb faster or slower. But over the long haul, we shouldn���t expect to do a whole lot better than a percentage point or so a year more than inflation.

4. The land underneath our homes should appreciate, but the dwelling itself will depreciate���and we���ll need to fork over hefty sums just to keep up with the general increase in home prices. As a rule of thumb, expect to spend a sum equal to between 1% and 2% of a home���s value on maintenance each year.

5. Any gain in our home���s value will likely be largely or entirely offset by transaction costs, maintenance, property taxes and homeowner���s insurance. Subtract those costs from our home���s annual price gain, and we probably aren���t keeping up with inflation and there���s a good chance we���re losing money.

6. The benefits of leverage are often offset by the cost of leverage. Homeowners may put down just 10% or 20% of a home���s purchase price���but they collect 100% of any price appreciation. Result: Even prosaic property price increases can be transformed into wondrous gains���or so it seems.

Let���s say we might put down $30,000 on a $300,000 home. If the home���s price rises 30% to $390,000, our home equity would soar 300%, from $30,000 to $120,000. But how much did we pay in mortgage interest to get that leveraged gain? Often, the total interest paid rivals the increase in home equity.

“If we sold soon after making home improvements, we might recoup as little as 50% of the money spent.”

7. The mortgage-interest tax deduction has always been overrated���and, today, that���s truer than ever. If we pay $1 in mortgage and we���re in the 22% tax bracket, we only save 22 cents in taxes, which means the other 78 cents is coming out of our pocket.

This assumes we itemize our deductions. But with the 2019 standard deduction at $24,400 for couples filing jointly, many homeowners will find their total itemized deductions are less than their standard deduction���which means they���re getting zero tax benefit from all the mortgage interest they pay.

8. If you���re a homeowner with a fixed-rate mortgage, what you really want is inflation. Why? That inflation will likely drive up both your home���s price and your salary, while leaving your mortgage payment unchanged. That means you can repay the mortgage company with depreciated dollars, while having more disposable income for everything else.

9. While a home���s price appreciation and mortgage-interest tax deduction will likely prove disappointing, homeowners enjoy one huge benefit: They get to live in the place. How much is this imputed rent worth? Think about how much you���d collect each year if you rented out your house.

10. All homes should be priced to deliver the same expected total return. Folks will talk about real estate in, say, San Francisco and Silicon Valley, as though these are magical markets that somehow defy economic norms.

The reality: The total return���the combination of price appreciation plus rent or imputed rent���should be similar across property markets. In other words, in highflying real estate markets, rents tend to be modest relative to home prices, so total returns aren���t unusually high. This has been borne out by academic research.

11. A paid-off home is the cornerstone of a comfortable retirement, for two reasons. First, by paying off our mortgage, we eliminate a major expense, making retirement more affordable. Second, thanks to the forced savings that come with paying down a mortgage���s principal balance, we eventually come to own a major asset free and clear. That asset can then help us to finance our retirement, either by trading down to a smaller place or taking out a reverse mortgage.

12. Remodeling is a money loser. If we undertake home improvements, we���ll increase the value of our home���but by less than the dollars we spend. For proof, check out Remodeling magazine���s annual cost vs. value survey. It analyzes 22 home improvement projects. Depending on the project, if we sold soon after making these home improvements, we might recoup as little as 50% of the money spent.

13. A real estate agent���s greatest financial incentive isn���t to get us the best price, but to get us to act quickly. If we spend an extra month looking for the right home���or holding out for a higher price���the agent might make little or no additional commission, but he or she will have to put in substantially more work.

Still, don���t allow yourself to be rushed. If you keep your house on the market for an extra month and make $10,000 more, that would be a huge win. And if you buy a house you aren���t entirely happy with and end up moving soon after, that would be a terrible mistake.

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Follow Jonathan on Twitter��@ClementsMoney��and on Facebook.��His recent articles include Price Still Slight and��Choosing Our Future. Jonathan’s��latest book:��From Here to��Financial��Happiness.

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January’s Hits

LAST MONTH was the best ever for web traffic in HumbleDollar’s brief 25-month history. What were folks reading? These were January’s most widely read blog posts:

Still Learning
Subtraction Mode
Saint Jack
Never Retire
Nursing Dollars
Repeat for Emphasis
Price Still Slight

January also saw readers flock to our early��January newsletter, as well as to a newsletter published in December.

Follow Jonathan on Twitter��@ClementsMoney��and on Facebook.��Jonathan’s��latest book:��From Here to��Financial��Happiness.

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This Old House

HOW DID MY��husband and I get where we are today���early retirement in Spain? One of the most critical decisions concerned our biggest expense: housing. As the one in charge of the family���s financial planning, I wish I could say I planned this outcome all along, but I didn���t. We were just lucky���though I like to think it was ���lucky��� in the sense that luck is when preparation meets opportunity.

When Jim and I got married in 2003���a second marriage for both of us���we needed a new place for our combined family of four, plus cats. I was happy to move into his rented 1,700-square-foot townhouse, but Jim wanted to buy a home that had more room for our two boys.

I was concerned about committing to a house purchase. Before I met Jim, I had been a single mom for five years. Like most divorcees, I���d experienced a huge financial setback, compounded by receiving no financial or child support from my ex. When I remarried, I felt I had barely gotten back on my feet financially and was wary of taking on debt. Additionally, at the time of our marriage in 2003, my salary was $47,000. My new husband had a teacher���s salary that wasn���t much more. To afford a home, our total mortgage payment would likely be right at the maximum recommended 28% of income.

In the end, we did what most couples do: We compromised. Our nonnegotiable common ground was our sons��� education. We agreed to buy a house in a good school district. It wasn���t necessarily ���the best,��� but it provided ample opportunity and had a diverse student body.

We didn���t fall for the realtor pitch to ���buy the biggest house you can afford.��� We ended up buying the most modest home that we could all be comfortable in. It came with a lower price than most homes in the neighborhood, because the house hadn���t been upgraded for 10-plus years, with old-fashioned but solid kitchen cabinets, wallpaper and older bathroom fixtures���and just enough room for a family of four.

We avoided renovations that merely beautified the house, such as cosmetic kitchen and bathroom upgrades. We loved the old-fashioned cabinets, the big Spanish floor tiled entrance that we were told was out of style, and the simple white bathroom tiles. They were functional, good quality and built to last���and, indeed, had done so since the house was constructed 40 years earlier.

We also didn���t spend a lot of money on home decor. In fact, when we moved in, all our furniture was already secondhand, either passed on to us from relatives or found at garage sales, thrift stores and even on the sidewalk on bulk trash pickup days.

Our one big mistake was buying a house that came with an old, unkept swimming pool that required year-round maintenance and incurred high electricity and water costs. We did the unthinkable: We had the pool filled in and replaced with a deck and yard. It cost us $7,000, but the $200 monthly savings in electricity and water meant we broke even after three years.

We did invest to make our home more energy efficient by adding $3,000 worth of insulation. That allowed us to claim a tax deduction, while ultimately saving on utilities. We took advantage of the home warranty program that came with the home to replace the dishwasher, hot water heater and double ovens, all at very little cost to us. Over the years, we also did some projects ourselves, like painting, installing new hardwood floors and putting up shelving. What we lost in professional installation was more than made up for by the family bonding time and the memories, which we all still cherish to this day. In addition to keeping our housing expenses low, we took advantage of rock-bottom rates during the Great Recession to refinance our mortgage from 5.5% to 3.5%.

This was the preparation. Opportunity came in 2016, when Dallas became one of the top places in the nation for��population��growth.��That growth drove housing prices to record levels three years in a row, with the median price of a single-family house in the Dallas area shooting up more than 50% from 2012���s level. It was a seller���s market, especially in our area, with its good school district. Since both our boys had graduated high school, we no longer needed to stay in the district. We seized the opportunity and sold.

The upshot: The house we bought in 2003 for $200,000 was sold for $340,000 in 2016. After paying off the $100,000 owed on the mortgage, we netted about $240,000, which enabled us to buy a smaller townhouse with cash. We had become mortgage-free in just 13 years. In 2018, we rented out our home. That provides us with rental income, which helps support our retirement here in Spain.

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 for HumbleDollar include The Gift of Life, Odds Against��and��Mind the Gap.��Jiab and her husband currently live in Granada, Spain, and 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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Off the Payroll

WHEN OUR daughter landed a great job after her 2018 college graduation, we expected her to soon move off the family payroll. She immediately budgeted to take on all routine living expenses, including housing, food, car and utilities. We did volunteer to cover some smaller expenses, largely in situations where family plans are available, such as cellphones, Netflix, Amazon Prime and AAA. We also kept her on our employer-provided health insurance, which involved no added cost.

Today, a third of millennials still live at home. I get it. Young adults may be seeking a job, continuing college studies, saving for a down payment or wedding, temporarily displaced, or simply lazy or fearful about entering the workforce. Even if they move out, many others receive parental financial help, similar to what we planned for our daughter.

But in our case, parental help turned out to be far larger than we expected.

My daughter���s first big challenge was finding a place to live. In her new city, tiny apartments rent for some $2,000 per month. These apartments were too small to store snow tires, camping gear, skis and other stuff that should now be hers to manage. I also struggled with throwing away $24,000 a year on rent. That���s when I suggested she look into buying.

This was a seismic shift from the original plan. Suddenly, our daughter had to step up and earn an instant PhD in real estate. She quickly learned that buyers get what they pay for���and that location, location, location is everything. Two important criteria were neighborhood safety and resale potential. After all, she might get a job transfer���a frequent occurrence early in a career. After considering many cheaper dumps, our daughter landed on a three-bedroom townhouse with a basement. It struck all of us as a solid value.

Of course, the townhouse cost far more than we ever anticipated and required significant parental assistance with the down payment. In effect, we moved forward part of her inheritance by a few decades. Still, her monthly housing costs, including principal, interest and property taxes, were lower than rent on an apartment, plus she had three times the space and was building home equity. Longer-term family wealth had clearly been improved���but we hadn���t exactly thrown her off the parental payroll. As I now tell friends, my daughter lives in my retirement Porsche.

This wasn���t the only payroll challenge. Our daughter���s company provides a matching contribution to participate in the 401(k) plan and a significant price discount on shares bought through the employee stock ownership plan. Over the past four years, our daughter has also funded a Roth IRA by contributing all summer job and internship earnings.

To make the most of these three plans, our daughter would have to save nearly 25% of her income. The upshot: If the goal was to maximize family wealth, further parental help made sense. The good news is, our daughter has a two-year plan to take over funding of all three programs, so parental help should be temporary. An added benefit: She���s locked into funneling her money into real estate and savings. That means there���s not a whole lot left over for the mall.

John Yeigh is an engineer with an MBA in finance. He recently retired after 40 years in the oil industry, where he helped manage and negotiate the financial details for multi-billion-dollar international projects. John now manages his own portfolio and has a robust network of friends, with whom he likes to discuss and debate financial issues. His previous blog post was Half Wrong.

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I Can’t Do That

THERE ARE TWO New Year���s resolutions I���d like to accomplish: I would like to gain weight and spend more money.

I’ve been trying to gain weight for such a long time that I���ve just about given up. I eat all day long until my stomach is about to explode. The next morning, I jump on the scale and my weight is back where I started the previous morning. Rachel looks at me amazed, as if I’m some kind of human garbage disposal. She���s always asking, “Where does all that food go?”

My friends tell me to eat a lot of high-calorie food. They suggest foods like jumbo pretzel hot dogs, fettuccine Alfredo and cheesecake. One friend offered to buy me a Denny’s Lumberjack Slam breakfast, noting it has almost 1,000 calories. He said it would be a great way to start my day if I wanted to put on weight.

I thought about all this advice. Do I really want to eat a lot of unhealthy food loaded with calories, so I can gain some weight?

The same thing can be said about my effort to spend more money. Do I really want to buy things I don’t need just so I can spend down my portfolio? I mentioned in a previous blog post that my financial planner told me that, if I don’t increase my spending, I���ll die with more money at age 100 than I have today.

I find the root cause of my eating and spending problem is very similar. My diet is low in calories. It���s comprised mostly of vegetables, fruits and lean poultry. It’s hard to gain weight when you���re eating food low in calories.

Ditto for my spending. My fixed expenses are low and my discretionary spending doesn’t involve any high-ticket items. Although I feel I���ve lately increased my purchases, they are mostly lower priced items.

I haven’t made it to the upper echelon���and I don’t think I’m getting there anytime soon. I always thought purchasing an expensive watch, SUV or designer clothing was like eating an unhealthy high-calorie chocolate cake with ice cream and whipped cream on top. I just can’t do it. I���ve abstained all my life from those kinds of purchases. I don’t think I have it in me to change now.

Rachel is no help. She���s as bad as me when it comes to loosening the purse strings. When we go grocery shopping, I better have a good reason to buy another box of cereal, when the cereal box at home still has two more servings in it. When it comes down to it, we���re both minimalists and live a simple life. We are two peas in a pod when it comes to spending.

When we buy something, it’s a lifetime commitment. We drive our cars until the wheels fall off. Rachel’s Honda Fit has 193,000 miles on it. My previous car, a Toyota Camry, had 237,000 miles. I’m still using my first iPhone. If all Americans spent like us, the economy would be in a recession.

In all honesty, there���s really nothing that I want to buy. We often have dinner out and we plan to go on some trips this year. But there are no other significant expenditures slated for the year ahead.

I now realize the amount of money you have doesn’t always determine the lifestyle you live. As my investment portfolio has grown over the years, my lifestyle hasn���t changed much. Sometimes, your life experiences and values determine how you live your life, not how much money you���ve accumulated.

Since I���ll likely never spend down my portfolio, I will probably donate part of my estate to charity. There are some causes I’m passionate about. Of course, I will also make sure Rachel is well taken care of���and, hopefully, she���ll find it within herself to spend the money. And if not, that’s okay: It’s all about enjoying life in the way you want to live it.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous articles include Say Yes,��Subtraction Mode,��Time to Reflect��and��Be Like Neil��Young . Follow Dennis on Twitter��@dmfrie.

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Spending Happily

IN THE GRAND scheme of things, money is just a tool and net worth is just a number. We shouldn���t work solely to make more money. Instead, our goal should be to use that money to create as happy a life as we possibly can.

In their book��Happy Money: The Science of Happier Spending, Elizabeth Dunn and Michael Norton explore this idea. How can we best use money to buy happiness? Dunn and Norton offer five key suggestions.

1. Buy experiences. The millennial generation gets a hard time in the press. We���re constantly berated for our spending habits, including traveling too much, eating avocado toast and drinking expensive coffee. But whatever our failings, the millennial generation believes in buying experiences over owning things���and that���s an effective way to use money to increase happiness, according to Dunn and Norton.

We���ve witnessed the generations before us purchase and hold onto far more items than can fit into their homes���which is why many folks also have storage units. We millennials don���t want to make that mistake: Buying experiences, and sharing them with others, gives us lasting memories that���ll bring far more happiness than we���ll ever get from another pair of shoes.

2. Make it a treat. If you commute to work every day, there���s a good chance you drive past a Starbucks. There���s an even better chance that the Starbucks drive-thru line is packed with cars.

I���m not here to tell you that you need to cut out the daily latte. Still, that special coffee drink may not be making you as happy as it once did. We adapt quickly to new habits and routines, including the coffee we consume. When we get used to having a special coffee every day, we don���t feel the same spike in happiness we initially enjoyed.

To combat this, we should forgo the daily latte and make it a treat instead. Drink a regular coffee Monday through Thursday and save the special coffee for Friday. That way, you���ll be able to look forward to the treat all week long, which is crucial: It isn���t always the event itself, but our anticipation of the event, that makes us happy.

3. Buy time. Are there any regular chores you absolutely hate? Whether it���s vacuuming, mowing the lawn, cleaning the shower or something else, outsourcing may be the key to increasing your happiness. We could use this newfound time to be with family, take a hike at a nearby trail or have a night out with friends.

That said, I think everybody should do a rigorous audit of their schedule before insisting that they simply don���t have enough time. We���re notorious for claiming we are busier than we really are. In fact, Dunn and Norton note that Americans, on average, spend about two months per year in front of the television, equal to some four hours per day.

4. Pay now, consume later.��Another simple way to increase happiness is to adjust when you pay for things. It���s been found that when we pay for goods or activities beforehand, we free ourselves up to enjoy the purchase much more. Conversely, if we don���t pay until later, we���re less happy.

Have you been to an all-inclusive resort? You���ll know that there���s no hesitation when ordering that cold drink while sitting by the pool. When we pay for goods or services upfront, it allows us to stop worrying about the money and instead focus on enjoying what we paid for.

5. Invest in others. If you���ve ever given to charity, monetarily or with your time, you have probably enjoyed the good feelings that come with it. Giving back is a wonderful way to boost not only your happiness, but also the happiness of others in your community.

In one research study, participants were each given $20. Some of the participants were instructed to spend the money on themselves, while others were instructed to spend the money on someone else. After the task was completed, those who gave their $20 to others reported greater levels of happiness.

My challenge to you: In the week ahead, spend your money to increase happiness in as many ways as possible. For example, what if you bought a Starbucks gift card today (pay now, consume later), used it later in the week to buy a special kind of coffee (make it a treat) and also paid for the drink of someone else in line (invest in others)? It could make for a far happier week.

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 Picture This,��Rewriting the Script��and�� Paper Chase . Follow Ross on Twitter @RossVMenke .

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Price Still Slight

DO THE CHEAPEST index funds always win? A year ago, I tackled that question���and the results for 2017��were mixed. Since then, the question has become even more intriguing. Last year, Fidelity Investments launched��four index-mutual funds with zero annual expenses, while also slashing the expenses on its existing index funds.

Those��zero-cost funds have only been around for a handful of months, so it’s a little early to gauge their performance. Ditto for the price cuts for other Fidelity index funds; They were only in effect for last year’s final five months and hence you don’t see the full benefit when you look at 2018’s results. Some other index-fund managers also trimmed their expense ratios last year, though none as dramatically as Fidelity. Still, I figured I’d check back and see how important costs were in driving differences in index-fund performance over the past 12 months. As with last year, I looked at both index-mutual funds and exchange-traded index funds (ETFs).

You might imagine that annual fund expenses should be your sole selection criteria when picking among competing index funds. And, indeed, if you swap from an S&P 500 fund like T. Rowe Price Equity Index 500 Fund, which charges 0.21% in annual expenses, to Schwab S&P 500 Index Fund, which levies a mere 0.02%, you’ll almost certainly get better results. Sure enough, in 2018, the Schwab fund outperformed by 0.16 percentage point.

But what happens when fund expenses vary by just 0.01% or 0.02%, equal to 1 or 2 cents a year for every $100 invested? Do such tiny differences in expenses still determine which funds fare better? I looked at four major index-fund categories: total U.S. bond market funds, S&P 500-stock index funds, total U.S. stock market index funds and total international stock index funds (those that own both developed foreign markets and emerging markets).

Here’s how five of the cheapest S&P 500 funds fared in 2018:

Fidelity 500 Index Fund

Annual Expenses: 0.015%
2018 Return: -4.40%

iShares Core S&P 500 ETF

Annual Expenses: 0.04%
2018 Return: -4.42%

Schwab S&P 500 Index Fund

Annual Expenses: 0.02%
2018 Return: -4.42%

Vanguard 500 Index Fund Admiral Shares

Annual Expenses: 0.04%
2018 Return: -4.43%

Vanguard S&P 500 ETF

Annual Expenses: 0.04%
2018 Return: -4.42%

S&P 500’s 2018 Total Return: -4.38%

It seems Fidelity’s low expense ratio has indeed given it a slight edge, but Schwab’s cost advantage hasn’t. The S&P 500 is a relatively easy index to track, because it includes just 500 stocks. The��Bloomberg Barclays U.S. Aggregate Bond Index is much tougher: It contains some 10,000 bonds, so funds buy a sampling of the index’s bonds and hope that sample matches the index. Here’s the 2018 performance for four of the cheapest funds that track the Bloomberg Barclays index:

Fidelity U.S. Bond Index Fund

Annual Expenses: 0.025%
2018 Return: +0.03%

iShares Core U.S. Aggregate Bond ETF

Annual Expenses: 0.05%
2018 Return: -0.05%

Schwab U.S. Aggregate Bond ETF

Annual Expenses: 0.04%
2018 Return: -0.09%

Schwab U.S. Aggregate Bond Index Fund

Annual Expenses: 0.04%
2018 Return: -0.12%

Bloomberg Barclays U.S. Aggregate’s 2018 Total Return: +0.01%

Again, Fidelity’s cost advantage seems to have helped. But given that its fund outpaced the index, even after costs, presumably it also benefited from the sample of bonds it held. Schwab’s two funds, by contrast, fell behind the index by even more than their annual expenses.

Vanguard has both a mutual fund and an ETF that track the Bloomberg Barclays U.S. Aggregate Bond Index, but they track a “free float” version of the index that gives less weight to a bond if part of the issue isn’t available to trade. Both funds fared slightly better than their benchmark index, despite the drag from their 0.05% expense ratios. When it comes to Vanguard’s ETF, as well as other ETFs listed here, we’re looking at the performance of the fund’s portfolio relative to its benchmark index���which is what the manager controls���and not at the ETF’s share-price performance, which can be slightly different.

In our final head-to-head competition, here are two low-cost funds that track the Dow Jones U.S. Total ��Stock Market Index:

Fidelity Total Market Index Fund

Annual Expenses: 0.015%
2018 Return: -5.28%

Schwab Total Stock Market Index Fund

Annual Expenses: 0.03%
2018 Return: -5.30%

Dow Jones U.S. Total ��Stock Market Index’s 2018 Total Return: -5.30%

Once again, Fidelity’s marginally lower expenses appear to have given it an edge. What about other low-cost total U.S. stock market index funds, as well as low-cost total international stock index funds? These others funds all track different indexes.

What to do? To gauge how important expenses are, I looked at how each fund fared against its benchmark index. You would expect a fund to lag its index by an amount equal to the expenses it charges. But that was never the case���and, in fact, all the funds listed below outperformed their benchmark:

Fidelity Global ex U.S. Index Fund

Annual Expenses: 0.06%
Fund vs. Index: +0.13%

iShares Core MSCI Total International Stock ETF

Annual Expenses: 0.10%
Fund vs. Index: +0.21%

iShares Core S&P Total U.S. Stock Market ETF

Annual Expenses: 0.03%
Fund vs. Index: +0.03%

Schwab U.S. Broad Market ETF

Annual Expenses: 0.03%
Fund vs. Index: +0.01%

SPDR Portfolio Total Stock Market ETF

Annual Expenses: 0.03%
Fund vs. Index: +0.07%

Vanguard FTSE All-World ex-U.S. ETF

Annual Expenses: 0.11%
Fund vs. Index: +0.16%

Vanguard Total International Stock ETF

Annual Expenses: 0.11%
Fund vs. Index: +0.19%

Vanguard Total Stock Market ETF

Annual Expenses: 0.04%
Fund vs. Index: +0.04%

The above three Vanguard ETFs also have companion index mutual funds. The Admiral shares of the mutual-fund versions, which now have $3,000 minimums, either matched their benchmark index or outperformed it.

Why didn’t the above total U.S. market and total international funds all trail their benchmark by the amount of their costs? Because the funds don’t own all the stocks in the underlying index, they may have got lucky with their sampling. On top of that, index funds often lend out the securities they own to money managers, who then sell short the borrowed shares in a bet that their price will fall. In returns for lending securities, index funds earn interest that’s often passed along to fund shareholders���thereby helping to offset the drag from fund expenses.

The bottom line: Tiny differences in fund expenses do appear to make a difference in performance, especially when dealing with indexes that include relatively few securities, like the S&P 500. But once you stray into more exotic territory, other factors come into play, though I’d still expect the funds with the lowest costs to win out over the long haul. Does that mean��it’s worth paying attention to 0.01% or 0.02% differences in fund expenses? Arguably, it is. Let’s say you invested $100,000 and earned 6.02% a year, rather than 6%. After 20 years, you’d have $1,212 more. That’s nothing to sniff at.

But before you starting shifting your portfolio to funds with lower annual expenses, ask yourself three questions:

Can you get all the low-cost funds you want, while still keeping your money at one brokerage firm or one mutual fund company? In the name of simplicity, I prefer to deal with just one investment firm���and I strongly suspect the executor of my estate will feel the same way.
What will your total annual cost be at your chosen investment firm? You don’t want to move to a new firm to get one or two super-cheap funds, only to find you’re paying more overall, because the firm’s other funds and services are a tad expensive.
If you decide to change investment firms, what’s the price to change���and is that price worth paying? If you have to sell existing index funds in a taxable account and that’ll trigger a large capital-gains tax bill, the answer is almost certainly “no.”

Follow Jonathan on Twitter��@ClementsMoney��and on Facebook.��His most recent articles include Choosing Our Future,��Saint Jack��and��Nursing Dollars. Jonathan’s��latest book:��From Here to��Financial��Happiness.

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Picture This

HAVE YOU EVER considered what you want your retirement to look like? Not just generically, but in vivid detail? If you haven���t, I urge you to go through this exercise as you flesh out your financial goals.

Visualization is used mainly by athletes as they prepare for competition, so that they can get as close to the experience as possible before the competition starts. This was witnessed across the world when American skier Lindsey Vonn���s visualization routine was caught on camera before an Olympic race.

You can see just how deeply in tune she is with the course that she’s about to hurtle down at 60-plus miles per hour. Why is she doing this? So she���s as prepared mentally for her race as possible. She is going through each turn by memory over and over, so that when she faces them in real life, she doesn���t find any surprises.

Vonn explained it this way: ���I always visualize the run before I do it. By the time I get to the starting gate, I���ve run that race 100 times already in my head, picturing how I���ll take the turns.���

This is how I prepared for golf tournaments while competing through high school and college. Before each round, I would take 10 to 15 minutes to close my eyes and visualize each hole and each shot I would face in the coming hours of competition. That way, I was prepared mentally for the challenges the day would throw at me. When a challenge did arise, I had already experienced it in my mind and was much more confident in my ability to overcome it.

Visualizing success is equally important when it comes to retirement and other financial goals. What���s the point in saving your hard-earned dollars for the future if you don���t know what it���s for? By establishing goals and visualizing that future experience, you���ll feel in real time what lies ahead.

To get started with visualization, write down your goals in great detail. Once your specific goals are established, write down how achieving those goals will make you feel. When you���re retired, what will your day be like from morning until evening? What challenges are you likely to face? Write down everything from how the coffee will taste, to what car you will be driving, to the clothes you will be wearing on the golf course.

Once you have this written down, spend another 10 minutes or so visualizing what you have just written down and truly feel the experience. Result? You will be crystal clear on what you���re trying to achieve and how you���ll feel when it happens. Visualization is a wonderful way to improve clarity, change behaviors and propel you toward your audacious goals.

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��Rewriting the Script,�� Paper Chase ,�� Start Small ��and�� Never Retire . Follow Ross on Twitter @RossVMenke .

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Gaming the System

I���M AN AVID player of video and computer games���along with 150 million other Americans. They���ve been a nice occasional escape from the pressures and obligations of the real world for more than 40 years and, now well into my 50s, I���m old enough to see them as merely that.

Youth, on the other hand, is more susceptible to having their behavior influenced, if not shaped, by interactive entertainment. There���s much debate as to whether such games promote dissociative behavior and even violence. But few consider the economic habits reinforced by repeated gameplay.

One of the most popular forms of electronic gaming, and my favorite genre, is the role-playing game, or RPG. The basic format: You play a character���or avatar���who goes on quests. As you complete quests, vanquish baddies and so on, you accumulate in-game wealth, often in the form of coins or gold. You can then spend your wealth in cyber-villages or at vending machines to acquire upgraded armor, weapons, magical items and other accoutrements of the game. To the extent there are any banks in such villages, they���re little more than extra storage space for gold and gear.

There are positive economic lessons to be had. I���ve used such games in my economics classes to demonstrate concepts such as marginal utility (better to spend on offense or defense?) and scarcity of resources (how does one maximize the available space in one���s backpack?). True, there are often high-priced items in the cyber-shops that require you to amass gold if you���re to purchase them. But almost always, the best strategy���and the game’s financial message���can be summarized in two words: Spend now.

Even more insidious: Some games seek to extract real money from children. A controversial technique is ���loot boxing,��� where children pay perhaps $2 to $20 to a gaming company for the chance to win rare and special items that help players succeed. Many countries now regulate such promotions, because they encourage gambling in children. While there have been calls to ���look into it��� in the U.S., to date there���s been no concerted action taken.

It���s tempting to dismiss these ���nudges��� (as Nobel Laureate Richard Thaler would call them) toward spending as minor influences. But we need to remember that financial behaviors and habits are built up like stalagmites���one small drip at a time until it���s an immovable block. Coupled with other media that send a concerted message to spend, and given the lack of counter-messaging, it���s small wonder that consumption is rising, while personal savings are in decline. By the time banks and financial institutions start advertising to potential customers, the bad habits are already inculcated.

Currently, only 17 states��require high school students to take a class in personal finance, and fewer than half require an economics course of any kind. There are great private initiatives, such as Tim Ranzetta���s��Next Gen Personal Finance, but they���re relatively few in number. The fact is, few educational systems, public or private, have a consistent, incorporated course of study on basic finance, the psychology of economic decision-making, or how to decode and respond to media messaging about financial issues. Kids are told to ���follow their passion.��� But how do you generate the income needed to support that passion? Good luck getting an answer to that question from today���s educational system.

What should parents do? You might ask your children to describe the economics of the video game they���re playing and whether they think it applies to real life. Better still, consider setting up a financial ���game��� with your children, where you research savings and investment opportunities. Your children have probably researched gaming advice in online forums. Let them show you how they can use those same internet research skills in real world finance. True, your real-world finance game will never allow your children to slay a dragon. But helping your children to earn real money���rather than just cyber-gold���can be a pretty big thrill, and it may nudge them toward better financial habits.

Jim Wasserman is a former business litigation attorney who taught��economics and humanities for 20 years. He has published articles on education, law and media literacy. Media, Marketing, and Me , Jim���s three-book series on teaching behavioral economics and media literacy, �� will be published in early 2019.��Jim lives in Granada, Spain, with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog on retirement, finance and living abroad at�� YourThirdLife.com.

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