Jonathan Clements's Blog, page 375

Repeat for Emphasis

JAMES CLEAR, in his bestselling book��Atomic Habits, offers this thought-provoking notion: Suppose a plane takes off from Los Angeles on its way to New York. But after taking off, the pilot turns the nose of the plane by an almost imperceptible 89 inches. Where will the plane end up? The answer: nowhere near New York. As it flies across the country, that 89-inch difference will take it hundreds of miles off course.

Clear’s purpose is to help readers appreciate a concept that���s difficult for the human brain to grasp: compounding. The idea���common in investing but also applicable to other areas of our lives���is that repeated actions build on each other to produce results that are dramatically larger than you might expect. A common and entertaining example: If you were to take a piece of paper and fold it in half and then fold it in half again, and do that 40 more times, it would grow so high that it would reach the moon. Continue folding that piece of paper just nine more times, and it would reach the sun.

Another example: Suppose you started with one penny on the first day of the month and then doubled it each day���to two cents, then four, then eight and so on. The results are similar to the paper experiment: After 10 days, you’d have $5. After 20 days, you’d have $5,000 and, after 30 days, you’d have more than $5��million.

While entertaining, these examples are so extreme that they���re of little practical value. But they carry an important lesson: The path to improvement in any domain does not require swing-for-the-fences, Herculean efforts. It requires only small steps done consistently. This is the meaning of ���atomic habits.���

The problem is, we’re just not very good at doing compound calculations in our heads. We tend to think more linearly. Ask people to guess at the paper folding question, and typical answers will be in the range of three feet. Answers to the penny question normally fall in the range of $1,000. Unless you work out the math step by step, it’s very hard to make an estimate that’s anywhere close to correct.

The result���because the human brain isn’t wired to think in compound terms���is we believe we have to take dramatic steps to see any progress at all. That’s why things like the keto diet are all the rage. Why aim for a lowly goal like losing a pound a week when you could shed 50 pounds in a matter of months? Or, in the world of personal finance, that’s why it’s common to see magazine covers promising ���137 Ways to Get Rich��� or ���8 Stocks to Buy Now.��� Get-rich-quick schemes appeal to people not because they’re lazy, but because they don’t appreciate the reliable math behind a get-rich-slowly��approach.

How can you apply the power of compounding to your personal finances? Here are three ideas:

1. If you’re early in your career and not saving at all, start with a small contribution to your 401(k), perhaps just 1% of your income. You’ll barely feel it and, at first, the progress will seem minimal. Indeed, it��will be��minimal. But don’t get discouraged. That’s the tricky thing about compounding. At first, the results will seem incredibly slow, but eventually they start to snowball���just like that penny that grows from $5 in 10 days to $5,000 in 20 days. The key is to keep going even when it feels like you’re going nowhere.

2. If you have a high income, you might not think it’s worth contributing to a Roth IRA.��As you may know, high income individuals aren’t eligible to contribute directly to Roth IRAs. Instead, you have to follow a two-step process. With an annual contribution limit of just $6,000, you might feel it isn���t worth the administrative effort.

But consider this example: Suppose you’re 35 today and married. You’ll be able to contribute a combined $12,000 to Roth IRAs in 2019 and increase the annual investment modestly over time, as the contribution limit increases. If you do that every year until you’re 65 and earn 7% average returns, you would end up with more than $1.5 million. Don’t think about it as ���just $6,000.��� Think about it as potentially $1.5 million.

3. If you have children in college and are paying astronomical tuition bills,��you might feel it isn���t worth the effort to economize, that any savings will be just a drop in the bucket. But suppose you’re 45 years old and your first child is entering college. Let’s say your kid is considering two private schools, each charging about $70,000 per year, but one offers $5,000 in aid. At first, that might seem like an insignificant difference.

But that ignores the value of compounding. If you shaved $5,000 off your tuition bill for four years and earned a 7% annual return on those savings, you’d end up with $100,000 at age 65. Yes, $5,000 might seem like a small difference in the context of the enormous bills you’re paying, but don’t think about it that way. Look at it as $100,000. Not getting offered that $5,000 in aid? Remember, private colleges are businesses���and they���re perfectly willing to negotiate aid packages.

Adam M. Grossman���s previous blogs��include Apple Dunking,��Intuitively Wrong,��Paper Tigers��and��What Matters Most . 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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Newsletter No. 41

LOOKING BACK, our financial choices almost never seem optimal. Why not? When we stared into the future and made those choices, we didn’t know what we were going to get���and that meant the only prudent course was to hedge our bets. I explore this issue in HumbleDollar’s latest newsletter.

While we ought to prepare our finances for a host of possible outcomes, we’re simply not very good at doing so. In the newsletter, I offer a slew of statistics on our prowess when it comes to risk management. The numbers, alas, are not impressive. The newsletter also includes our usual list of the dozen blog posts published by HumbleDollar over the past two weeks.

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

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Choosing Our Future

WHEN FOLKS have financial questions, they go hunting for the right answer. But what if there���s no right answer to be found?

To be sure, in retrospect, the correct answer is often crystal clear. Looking back at 2018, we should have owned growth stocks until September and then gone to 100% cash. If our home didn���t burn down and our health was good, we shouldn���t have bothered with homeowner���s and health insurance. If we kept our job and survived the year, we didn���t need that emergency fund and we wasted time planning our estate.

Seem reasonable? We have an inkling that perhaps we should have gone to cash in September. After all, we knew stocks were expensive and we had this premonition the market would fall. This is what���s called hindsight bias. At the time, we also had a premonition the market would keep rising, but four months of rocky share prices have erased that failed forecast from our memories.

When it comes to the other stuff���the insurance policies, the emergency fund, the estate plan���we have a more rational response: Yes, looking back, we didn���t need these things. But what if matters had turned out differently?

That, in a nutshell, is why there are no precise right answers when managing money. We may have only one past, but there are all kinds of possible futures���and we don���t know which one we���ll get, so we have to make sure our finances can weather a range of potential outcomes. That inevitably means that, in retrospect, our financial choices never look optimal.

What if they do? In all likelihood, we weren���t incredibly prescient, but rather unbelievably foolish. What if we had gone to 100% cash in September���and the stock market had soared? What if we hadn���t bothered with homeowner���s insurance���and our home had burned down?

We may not be able to predict the future, but we can prepare for it, by endeavoring to control the range of outcomes, so the future is more to our liking. To that end, we have three key levers at our disposal: saving diligently, holding down financial costs and managing risk.

The first two are straightforward enough, but the third takes more thought. To manage risk, we need to ponder the host of misfortunes that might befall us���and decide which would have such dire financial consequences that we need to take steps to soften the potential blow. Are Americans taking the necessary steps? Sometimes yes, sometimes no���as you���ll discover below.

Taking Our Chances

HOW ARE WE doing when it comes to managing risk? It���s a mixed bag:

Four out of 10 adults would have to borrow, sell something or simply couldn���t pay if they were hit with a $400 emergency expense, according to a Federal Reserve survey. As I���ve argued before, the big financial emergency is losing your job. Without severance payments from employers and unemployment benefits from the government, it���s hard to imagine how many folks would cope if they were out of work for an extended period.
We do an okay job of managing investment risk���or so it strikes me. I never come across investors who are banking everything on one or two stocks. They might take a flier on a couple of individual companies, but they keep the bulk of their portfolio in funds, both the mutual fund and exchange-traded varieties. Thanks in part to 401(k) plans, funds have become hugely popular���and deservedly so.
Among households with children under age 18, one out of five has no life insurance, says Limra. That number would likely be far higher without employer-provided coverage. Indeed, today, more families have group life insurance���often through their employer���than individual coverage.
As of 2017, 9% of Americans didn���t have health insurance, down from 16% in 2010. That decline reflects not only the government subsidies available under the Affordable Care Act, but also the penalty that was levied���before 2019���on folks who didn���t have coverage.
Among those age 65 and older, with annual incomes above $20,000 and who aren���t currently eligible for Medicaid, just 16% have long-term-care��insurance. What about everybody else? A minority could pay long-term-care costs out of pocket���and presumably the rest plan to deplete their assets and then rely on Medicaid, which pays roughly 60% of U.S. nursing home costs.
More than a third of working Americans don���t have disability��insurance. True, disability benefits are available from Social Security. But not everybody qualifies and, even if you do, the monthly payments likely wouldn���t cover your household expenses.
It seems we���re more diligent about protecting our possessions than protecting ourselves. Homeowners almost always have homeowner���s insurance, in large part because the mortgage company insists. Similarly, most car owners have auto insurance, because state law requires it.

As you���ll gather from the above list, the situation for many families would likely be far more perilous, if it weren���t for a host of government and employer programs. What if these programs didn���t exist? Perhaps folks would take more responsibility for their financial future���but I have my doubts. It seems that, as with so many other aspects of our lives, we���re far too focused on today and don���t worry nearly enough about tomorrow.

Latest Blog Posts

Most folks underestimate their life expectancy. Jiab Wasserman tells readers how to get a better handle on this crucial number.
Got grand ambitions for 2019? Take Ross Menke���s advice: Start small. As Ross notes, many of the great success stories had humble beginnings.
“On his deathbed, one of the last things my father said was, ‘Honey, spend the money’,” recalls Dennis Friedman. “He was talking to my mother���but I think I���ll also follow his advice.”
When faced with a financial choice, John Yeigh’s preference is to compromise. His friends say he’s consistently half-wrong. Yeigh likes to think he’s always half-right.
Remembering��Jack Bogle: the day he visited The Wall Street Journal���s 10th��floor newsroom.
Do you think a national health-care system would be a bonanza for the U.S.���or an unmitigated disaster? Whichever side you’re on, consider eight points from��Richard Quinn.
“The stock market is not a tightly controlled lab experiment,” notes Adam Grossman. “There’s a lot of data, but much of it is contradictory and incomplete, so it shouldn���t be viewed as conclusive.”
What beliefs guide your financial behavior? Ross Menke��takes a look at four money scripts���and how they can help or hurt your��financial well-being.
A semi-private room in a nursing home now costs an average $89,000 a year. How can folks prepare their finances? Morningstar’s��Christine Benz offers her thoughts.
If you own a vacation home, there’s a nifty tax break if you rent it out for just 14 days each year���but a potentially nasty tax hit if you sell.��Julian Bl ock��explains.
Is marriage unnecessary for retirees? “When I think of us getting married, I see it more as a business transaction that will bring greater happiness and security to our relationship,” writes��Dennis Friedman.
Starting to receive year-end financial and tax statements? Ross Menke��uses a three bucket system to figure out what to keep and for how long.

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

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Rewriting the Script

WHAT DO YOU believe about money? I���m talking here about money scripts���subconscious beliefs developed since childhood that influence your financial behavior.

These beliefs have been studied extensively by Ted and Brad Klontz, the father-and-son team who founded the Financial Psychology Institute and authored Mind Over Money.��Here are some common money scripts:

���Avoid debt at all costs.���
���Money is the root of all evil.���
���We can always make more money.���

While there���s an element of truth to each, problems arise when we accept them as absolute truths: They can spur damaging financial behavior and cost us dearly. Beliefs about money can be categorized into four broad categories���three of which will likely hurt your financial well-being:

Money Avoidance.��Folks in this category believe that money is somehow bad, leading them to overspend and ignore financial problems. They may vacillate between believing money can solve all of their problems and being scornful of those who have money. Money avoiders typically end up with little money saved.

Money Worship.��Money worshippers believe that more money and possessions will solve all their problems, and yet they also think that they���ll never be able to afford the life of their dreams. This can lead to unhealthy financial behavior, including working too hard to obtain more money, hoarding possessions and racking up consumer debt.

Money Status.��Individuals in this category see a direct connection between their self-worth and their net worth���or, at least, their net worth as perceived by others. They feel a need to put their possessions on display, as they strive to ���keep up with the Joneses.��� Thanks to their overspending, which is sometimes coupled with a gambling habit and a tendency to lie to their spouse about their spending, people in this group often end up accumulating relatively little wealth.

Money Vigilance.��These individuals tend to be very aware of where they stand financially and are overly concerned about their financial well-being. Common traits are hard work, frugality and a belief in never accepting a financial handout. Although there���s a level of financial anxiety associated with money vigilance, it often results in a higher income and net worth. This can ultimately be a good thing. But taken too far, money vigilance can cause folks to never truly enjoy the wealth they amass.

Do you have any of these traits? Since these money scripts have most likely been in place for your entire life or ever since a major, life-altering event, change likely won���t come easily. It may take a huge effort to reverse course and build new, positive habits���and, for that, you may need help from somebody with a sound knowledge of financial psychology who���s able to coach you toward better behavior.

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

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Say Yes

“I DON’T GET IT.” That’s what my friend said when I told him I would consider marrying my significant other.

“Why do you feel you need to get married?��� he continued. ���You���re both in your 60s. You���re not going to have any children. There���s no reason you should get married. If you did, you would make the relationship more complicated. You both probably would want a prenuptial agreement protecting your assets. That, in itself, could create some hard feelings. If it’s not broke, don’t fix it.”

Is he right? Is marriage unnecessary for an older single person who���s retired or close to it?

According to the Institute of Family Studies, “Among those ages 18 to 64, the share of currently-married adults has decreased consistently, reaching a record low of 48.6% in 2016, when the most recent Census data was available. In contrast, the share among adults ages 65 and older has increased slightly over the past five decades. As a result, adults ages 65 and older became more likely than younger adults to be married in the mid-2000s, and in 2016, a majority of older adults were married.��� One reason for the rise of married older adults: People are living longer, so there are fewer widowed adults.

Maybe, for many older adults, there���s no reason to get married. Living together may indeed be the right financial answer. Let���s say your spouse passed away and you���ll be eligible for Social Security survivor benefits at age 60. You would lose those benefits if you remarry before age 60. If your previous marriage had ended in divorce, remarriage might also end alimony payments.

Marriage means different things to different people. Rachel, my significant other, sees marriage as a boat. Couples spend their days traveling up and down the waterways, with a harbor to come home to. That harbor is marriage, full of warmth and sweetness. Marriage is more of a state of mind for Rachel.

When I think of us getting married, I see it more as a business transaction that will bring greater happiness and security to our relationship. I’m six years older than Rachel. I want her to quit work at age 65, so we can travel more. I will be 71 years old. I feel we should travel while we’re still healthy.

For us to do so, she needs to feel financially secure about retiring at age 65. My Social Security benefit will be significantly larger than Rachel’s. If we got married, she would be eligible for a larger survivor benefit after my death. Hopefully, that would make her feel more financially secure.

And I would get what I’m looking for, more time for us to travel the world together. I see it as a win-win proposition for both of us.

My friend might be right that marriage is not for everyone. After listening to Rachel’s views about marriage, I do know marriage is not age-related. As Rachel would say, thinking of marriage can make you feel young again���no matter what your age.

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

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Saint Jack

WITHOUT A DOUBT, John C. Bogle is the greatest man I’ve had the privilege of knowing. Tomorrow, the newspapers will run obituaries detailing his many accomplishments���how he launched Vanguard Group, started the first index mutual and was, right up until the end, a fierce advocate for the everyday investor.

I first met Jack in 1987, when I was a callow 24-year-old reporter at Forbes magazine. I last saw him in October, at the Bogleheads’ conference in Philadelphia. The day before, he had been in hospital. That didn’t stop him from turning up at the conference and dishing out his views on a host of financial topics.

But my favorite memory of Jack is from the early 2000s. I recounted that occasion in a letter included in a binder given to Jack to mark his 80th birthday. The letter was subsequently reprinted in a book about Jack, The Man in the Arena, edited by Knut Rostad. Here’s what I wrote:

Five or six years ago, when I was still with The Wall Street Journal, Jack called to say he was in the World Financial Center, he had a few minutes to spare and would it be okay if he stopped by. Soon enough, he was striding across the 10th floor newsroom, slightly stooped to be sure, but���like Cassius���he had that “lean and hungry look. He thinks too much: such men are dangerous.”

Giants of corporate America occasionally made their way through the Journal’s newsroom, but they typically moved quickly, lest lingering too long might invite awkward questions. Not Jack. He snagged a cubicle, commandeered a phone and, before long, had the ear of those around him. On display was the charisma and principles that built Vanguard. That I expected.

On that day, however, I saw another side of Jack Bogle. Here he was, conversing easily with my fellow ink-stained wretches, a motley crew of skeptical, disaffected ankle biters, who all believed themselves engaged in an important endeavor but would never dream of admitting as much. And Jack fit right in. It was as if one of us had made good and now was returning to the old neighborhood for a visit. This man might be a corporate visionary, but underneath he had the sensibilities of a newspaper reporter. It was at that moment that I realized why journalists loved Jack.

Farewell, John C. Bogle. You left the world a far, far better place than you found it and, for that, the rest of us will be forever grateful.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Nursing Dollars,��Beyond Cheap��and��What Now. Jonathan’s ��latest book:��From Here to��Financial��Happiness.

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The Gift of Life

GLOBAL LIFE expectancy for almost every nation will rise during the next two decades, with Spain overtaking Japan as the country with the longest life expectancy. Meanwhile, on the list of 195 countries, the U.S. will fall 20 places, from 43rd to 64th. The average U.S. lifespan as of birth is still projected to increase slightly, from 78.7 years to 79.8, but at a slower rate than the rest of the world.

That isn���t great news for the U.S.���but it isn���t necessarily bad news for you, for two reasons. First, the longer you live, the longer you can expect to live. As you plan for retirement, you should focus not on life expectancy as of birth, but on life expectancy as of, say, age 65. According to the Social Security Administration, a 65-year-old man in the U.S. can now expect to live until age 84, on average, while a 65-year-old woman is looking at age 87.

Second, life expectancy statistics are based on averages with a great deal of��variability���and, for you, they could prove to be misleading guide. For instance, income is a strong predictor of life expectancy, as is gender: Women live longer at every income level than men. The implication: Those on the upper end of the wealth spectrum should not use simple averages in planning for their own retirement.

When we see news reports of people celebrating their 100th birthday, we often chalk it up to “good genes.” But research shows genes play a smaller role than most people think in determining��longevity. More crucial is lifestyle. If you eat better, smoke less and exercise more than your parents did, there���s a good chance you���ll live longer.

According to the Stanford Center on Longevity, most individuals underestimate their personal longevity. A key reason: People base their planning on their grandparents��� or parents��� lifespans. But individual life expectancies have improved dramatically over the past century. Typical is my own family. Both sets of my grandparents passed away in their early to mid-70s and yet my parents are still alive at 80 and 82.

While you can���t know with certainty how long you will live, it���s important to be aware of the possible longevity for someone of your general age, education and health characteristics. Here are three good calculators to estimate longevity, ranked from fewest to most inputs:

Longevity Illustrator , a tool developed by the American Academy of Actuaries and the Society of Actuaries, is a simple online calculator that���s designed to estimate longevity based on four inputs: birthdate, gender, smoking habits and general health. In addition to showing the probability of living to a certain age, the tool also provides a planning horizon���the numbers of years you can expect to live as an individual or as a couple.
Lifespan Calculator , from Northwestern Mutual, shows how lifestyle choices affect longevity. There are 13 questions. By varying the inputs, you can see the impact of each on your longevity. For example, the difference between the most and the least healthy diet is five years, and the difference between a nonsmoker and a two pack-a-day smoker is 10 years.
�� Living to 100 ��Life Expectancy Calculator was developed by Thomas Perls, the founder and director of the New England Centenarian Study, the world���s largest study of centenarians and their families. There are 40 quick questions, including personal information (age, marital status, formal education), lifestyle (pollution, caffeine, smoking, alcohol), nutrition (weight, height, diet, exercise habits), health (cholesterol, blood pressure, diabetes) and family history.

Time is our most precious resource, and the statistics and current trends indicate we���ll enjoy more of it than ever before. But it also means we need to prepare ourselves accordingly, including saving enough and pursuing strategies that ensure we won���t outlive our money. In addition, we need to understand our financial options, including products like reverse mortgages��and how they could fit into our retirement strategy.

Instead of planning for how long you estimate you���ll live, consider financial solutions that work regardless of lifespan. Those solutions include delaying Social Security benefits, favoring employers that offer traditional pension plans and considering different types of income annuity.

True, annuities have a bad reputation. But partially annuitizing��your assets can help you build an income floor for retirement, while providing protection against the financial risk you���ll live a surprisingly long time, argues financial expert Wade Pfau. He also makes the case for delaying Social Security to get a larger monthly benefit, describing Social Security as the best annuity money can buy.

Jiab Wasserman recently left from her job as a financial analyst at a large bank at age 53. She’s now semi-retired. 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 . Her previous articles for HumbleDollar include Mind the Gap, Not So Fast��and��Odds Against.

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Half Wrong

I WAS SINGLE-track mountain biking with two friends. We had stopped for a rest���which was when I discovered how completely wrong I���d been with most of my financial decisions.

We had all recently retired from the same company and were debating when to claim Social Security. One buddy stated that he planned to start at age 70, so he would receive the maximum monthly payment possible. He defended his position by arguing that he was in good health, which could be indicative of a long life, and this strategy is promoted by the majority of financial pundits.

The other friend said he was starting Social Security now, at age 62, the earliest possible age. He cited some recent studies���including one from the Social Security Administration���that indicated potentially greater wealth if payments are started early and then invested at a healthy return. On top of that, he noted some pundits are now suggesting that wealthier folks will likely face increased taxation on their Social Security payments in the years ahead.

My two friends then looked to me as the de facto referee, asking which of the two approaches I planned. Rather than supporting either strategy, I replied that I planned to split the difference and claim Social Security at 66, assuming no change in overall health. I justified my position by saying that I didn���t have any idea when I would die or what future tax rates would be. One friend promptly retorted, ���You���re committing to being half wrong, no matter what.���

We hit the trail for an additional hour of biking. Upon finishing, the conversation returned to financial topics. Our former employer allows retirees to take their pension as lifetime annuity payments, a lump sum payout or some combination thereof. A few retirees favor the company���s annuity option, which is far more generous than income annuities that can be purchased as an individual. This option eliminates future market risk, generates income to supplement 401(k) investments and provides longevity insurance against outliving other assets.

Meanwhile, most retirees favor the 100% lump sum option, because it provides an inheritance in the event of early death and, if properly managed, the chance to outpace inflation and increase wealth. Unlike most of my peers, including my two friends, I elected to take my pension as a combination���mostly a lump sum, but also with a small annuity. In other words, I hedged my bets, which means I���ll end up being at least somewhat wrong.

My compromising and likely wrongmindedness didn���t end there. The annuity payouts were offered with a number of options, including joint survivorship (which means my wife continues to receive payments after I die) and a number of years certain (meaning there would be a minimum number of payments, even if I died earlier). Again, I hedged my bets���opting for both joint survivorship and a minimum five years of payments���which resulted in me receiving a lower monthly annuity payment.

Conventional wisdom also suggests immediately investing a pension lump sum payout, because the stock market rises over the long haul. This is exactly what one of my friends did. While I invested the majority of the payout immediately, I also trickled additional portions of the payout into stocks over time. This approach hedged against the possibility of an immediate market downturn, but it turned out to be another of my clearly ���half wrong��� moves.

Until I had these discussions with my biking friends, I never realized how consistently wrong I���d been with my financial decisions. Again and again, I���d opted for the compromise solution and never fully committed to any approach. As my two friends reminded me, I���m always ���half wrong.��� But I���m fine with that���because I know I���m also ���half right.���

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.

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Apple Dunking

IN 2005, the comedian Stephen Colbert popularized the word ���truthiness.��� This term, if you aren���t familiar with it, refers to something which��seems��like it should be true, but isn’t actually supported by evidence. Are stock market pundits guilty of truthiness? To answer the question, let’s look at a recent event.

First, some background: In the life of an investment analyst, there���s a rare but dreaded phenomenon known as a ���profit warning.��� This occurs when a company can tell, based on preliminary numbers, that its quarterly results are going to be truly dismal and far below expectations. When companies find themselves in this uncomfortable situation, they move quickly to disclose what they know, rather than waiting and surprising everyone on the regularly scheduled quarterly conference call.

That is what just happened to Apple for the first time in 16 years. In a letter to��shareholders, CEO Tim Cook warned that iPhone sales had been weak and that revenue would be��down��$4 billion from last year. The stock price reaction was swift: down 10% the next day.

In response to this event, market pundits immediately took to TV and radio with these opposing viewpoints:

Apple detractors were quick to point out that ���trees don’t grow to the sky.�����In other words, companies can’t keep growing at a rapid clip forever. Just as IBM, Xerox and BlackBerry have all seen their stars fade, it is now Apple’s turn. To support their view, detractors point out that iPhone sales have��plateaued��and that Apple hasn’t delivered any truly new products in years. To further support their view, detractors pointed to Cook’s letter, in which he seemed to be grasping at straws, blaming slow iPhone sales on things like the availability of inexpensive battery replacements.

Apple supporters, on the other hand, took the position that ���this too shall pass.�����In their view, the stock market is simply overreacting. They see Apple���s stock as a bargain at these lower prices. After all, Apple is still the smartphone leader in the U.S. Last year, they sold an astonishing 217 million phones. To bolster their view, Apple supporters point to Cook’s letter, which noted a number of non-Apple-specific issues, including exchange rates and trade tensions with China. In other words, Apple is just fine. Sure, it wasn’t a great quarter, but Apple was simply the victim of factors beyond its control.

What should you conclude from these contradictory viewpoints? Is one side or the other guilty of truthiness? When you hear these types of things on TV or see them quoted in the newspaper, who should you believe?

My view is that you should ignore them both���but not because either is guilty of truthiness. Market analysts are all trained to rely on data. You can see that in the above examples: Both sides cite evidence���in fact, they both cite the same letter from Cook���but that’s precisely the problem. The stock market is not a tightly controlled lab experiment in which one can draw conclusions from the data. Far from it. Yes, there’s a lot of data, but much of it is contradictory and incomplete, so it shouldn���t be viewed as conclusive. Market analysts��sound��like they���re stating facts, when in fact they are really just stating opinions. That’s why I wouldn’t get too worried, or excited, in response to anything you read or hear about the market or any individual stock.

According to Philip Tetlock, an authority on forecasting, there���s a��negative��correlation between an analyst’s reputation and his or her forecasting accuracy. All that time being interviewed on TV, it turns out, leads to overconfidence. The upshot: To the extent that you should ignore market analysts, you should be especially leery of those who are well known.

Adam M. Grossman���s previous blogs��include Intuitively Wrong,��Paper Tigers��and��What Matters Most . 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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Nursing Dollars

LONG-TERM CARE is the elephant in the room that many of us try mightily to ignore. It���s a potentially huge expense: A semi-private room in a nursing home costs an average $89,297 a year, according to��Genworth Financial.

But what should we do about it? For answers, I turned to Christine Benz, director of personal finance at Chicago financial researchers Morningstar Inc., where she���s worked for more than 25 years. Benz has written extensively on long-term care (LTC). She���s also had personal experience: Together with her sisters, she helped oversee the care for her elderly parents.

How big is the risk?��Half of folks turning age 65 will eventually need some form of long-term care, as Benz notes in her latest annual compendium of LTC��statistics. But at any given time, the vast majority of those receiving care aren���t in nursing homes. Instead, they remain at home, often receiving help from unpaid caregivers, such as their friends, spouse and adult children.

But as Benz can attest, the logistics of home-based care are daunting. ���You really need a trusted adult child to help you make it all happen���the hiring of caregivers and the managing of caregivers and the maintenance of the home,��� she says. ���There are all these things that swirl around staying in your home. You need to make sure your children are on board with that plan.���

While most LTC takes place at home, half of those 65 and older will, at some point, find themselves in a nursing home, calculates��Boston College���s Center for Retirement Research. But��50% of the men and 39% of the women who spend time in a nursing home stay three months or less, which means Medicare likely paid at least part of the cost, assuming the nursing home stay followed a qualifying hospital stay.

Not everybody gets off so lightly. The U.S. Department of Health and Human Services estimates that 15% of those 65 and older will rack up long-term-care costs of��$250,000 or more (and the tab would likely be far larger, if we put a dollar value on the unpaid help from friends and family). If you have few assets, much of this cost will be picked up by Medicaid. What if you don���t? It could be coming out of your pocket.

Should you buy insurance?��If you have less than, say, $300,000 in savings, you should probably skip LTC insurance. By the time you need nursing home care, you’ll likely have depleted your savings���or close to it���and hence you will qualify for Medicaid, which pays some 60% of U.S. nursing home costs. One downside: You���ll face limits on where you can receive care.

At the other end of the wealth spectrum, you might consider self-insuring (though Benz prefers the phrase ���self-funding,��� noting that there���s no risk pooling involved���a key component of any form of insurance). In the past, I���ve suggested that those with portfolios of $1 million and up can probably afford to pay LTC costs out of pocket. Between portfolio withdrawals and Social Security benefits, the cost should be manageable.

Benz sets the level even higher���at perhaps $1.5 to $2.5 million���and she may indeed be right. As she notes, the right number depends on a host of��factors, including the cost of nursing homes in your area and whether you���re married. Benz also points out that folks with a high spending rate early in retirement may not be left with enough to cover nursing home costs, even if they do quit the workforce with $2 million.

If you have a handle on local LTC costs, she says you might set aside enough to cover, say, 2�� years of nursing home expenses in a separate investment bucket���and perhaps twice that sum if you���re married. Even then, be aware of what Benz calls a ���fat-tail event������the risk that you���re among the 10% of nursing home residents who stay five years or more. How would you cope with that cost?

For those who plan to pay LTC costs out of pocket, Benz suggests saving traditional IRA assets for that moment. Yes, withdrawals will be taxable as ordinary income. But you���ll likely have hefty tax-deductible health-care costs, and you can use the deduction to trim the tax hit on your IRA withdrawals.

What type of insurance should you buy?��It���s the middle group���those with between, say, $300,000 and $1.5 million���who should seriously consider buying LTC insurance. Problem is, the insurance industry hasn���t exactly covered itself with glory. ���It���s hard to vouch for the long-term-care insurance market,��� Benz says.

Many policyholders have been hit with alarmingly large premium increases���sometimes so large that they can no longer afford their policy, forcing them to either drop the coverage or see if the insurer will allow them to continue paying their current premium in return for a reduced benefit.

Faced with this sorry history, folks have recently turned to hybrid policies that combine, say, life insurance with an LTC benefit or a tax-deferred fixed annuity with an LTC benefit. If you use the benefit, the eventual payout on the life insurance or fixed annuity is reduced.

Sound appealing? These hybrid policies offer a way to insure against LTC costs without the risk of big premium increases down the road. But as Benz points out, these products also involve a hefty opportunity cost: In return for the LTC benefit, you���re giving up the chance to invest the money elsewhere���where it could be earning far higher returns.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Beyond Cheap,��What Now��and��Strings Attached. Jonathan’s ��latest book:��From Here to��Financial��Happiness.

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