Jonathan Clements's Blog, page 379

Happy Compromises

A LITTLE WHILE back, a friend���let���s call him Paul���recommended a book with an unusual title:��How Not to Die. As you might guess, it���s about health, nutrition and longevity. Since Paul is a cardiologist and knows a thing or two about what can land people in hospital, I took his recommendation seriously and immediately ordered a copy.

When the book arrived, I learned that the prescription for not dying isn���t so simple. In fact, it runs nearly 600 pages. Result: The book sat on my shelf, unopened, for several months.

Recently, though, I was leafing through it and got to a section on soft drinks. The authors’ view was unequivocal: ���They don���t just fail to promote health���they actually seem to promote death.��� As a longtime soda consumer, this caught my attention and motivated me to cut it out of my diet.

This isn’t a story about nutrition, though. I share this because I see an important parallel between health decisions and financial decisions. Why didn’t I open��How Not to Die��for so many months? Because I viewed it as an all-or-nothing proposition: Either I was going to read and accept all 600 pages of its prescriptions, or I wouldn’t open it at all. Yet, when I did open the book, I realized that it was hardly all-or-nothing.

When it comes to financial questions, I suggest looking at it the same way. Don’t worry about answering every question and solving every problem. What’s most important is to avoid becoming paralyzed by indecision. A single step in the right direction is far more valuable than standing still. Below are three common dilemmas that often lead to financial indecision���and how to escape the quicksand:

1. I’ve heard that market timing is a bad idea, but I’m worried about the stock market. What should I do?

Virtually all academic studies agree that market timing is a bad idea. That’s because it’s impossible to predict the myriad political and economic events that can impact the market. But if you’re feeling stuck because you don’t know which way the market is going, there are lots of strategies you can employ.

One is dollar-cost averaging. Suppose you want to buy $10,000 of stocks. With a dollar-cost averaging approach, you might buy $1,000 each month for ten months. This doesn’t guarantee a better result. But it can help minimize regret and may be better than waiting forever on the sidelines.

Another approach is to use decision rules. For example, you might decide to buy more stocks only if the market drops below a specific level. Or, if you have stock options, you might decide to sell a specific number of additional shares only when the price reaches a certain level. These kinds of rules are great because they replace emotion with a mechanical process, ensuring that you follow through.

A third approach, if you can’t ignore your gut feel about the market, is to split the difference and do a small amount of market timing. Cliff Asness, a well-regarded fund manager, refers to this as “sinning a little.” If you time the market with a slice of your portfolio, it might help or it might hurt. The important point: It doesn���t need to be an all-or-nothing decision���which could be extremely damaging.

2. I’m unhappy in my job and want to make a move, but I have a family and don’t want to do something rash.

In his book��Life Is a Startup, University of Southern California professor Noam Wasserman offers a useful framework for making sound career decisions. Borrowing from his research on startup companies and their founders, Wasserman points out that the most successful career moves result when you combine ���the passion of the evangelist with the clear thinking of the analyst.���

In other words, follow your heart, but look before you leap���really��look. To do this, Wasserman advises ���staging��� your dreams. Dip in a toe before jumping headlong. As Wasserman puts it, try to find ways to ���date��� potential opportunities before you commit. This will allow you to avoid getting boxed in by all-or-nothing decisions.

3. My company offers a Roth 401(k). It seems appealing, but my tax rate is very high right now. What should I do?

As I have��pointed out��in the past, the Roth question hinges largely on a relatively simple tax question: Will your tax rate in retirement be higher or lower? If you expect it to be lower, which is often the case, a Roth likely won���t make sense. But there’s a big wrinkle: No one knows what Congress will do with tax rates. With the��trajectory��of government debt, it’s not inconceivable that rates might have to go higher within our lifetimes.

If that were to occur, your tax rate could end up��higher��in retirement, making Roth contributions appealing, even if you���re in a high tax bracket today. My recommendation: Once again, don’t view this as an all-or-nothing decision and don’t view it as permanent. If you want to contribute to a Roth 401(k), you might do so with half your savings���and then mark your calendar to reevaluate the decision each year.

Adam M. Grossman���s previous blogs��include Pushing Prices,��Counting Down��and��Deadly Serious . 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. 38

IS THAT BUNDLE of joy really a source of joy? Lots of parents���myself included���think so. But the data suggest otherwise. Numerous academic studies have found that parents tend to be less happy than the childless. The latest HumbleDollar newsletter delves into this thorny issue.

The newsletter also includes our usual list of recent blogs. Our next newsletter���the final one of 2018���is slated for Saturday, Dec. 22.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Taking Us for Fools,�� The View From Here ��and�� A Little Perspective . Jonathan’s latest book:��From Here to��Financial��Happiness.

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No Kidding

DO CHILDREN BRING happiness? As someone who has invested heavily in small people over the years���I have two children and two stepchildren���I want to believe the answer is ���yes.��� But the evidence suggests otherwise.

This, I realize, is a touchy subject, so let me offer a few crucial caveats before you fire off that fiery email. The studies cited here offer conclusions based on broad averages. Your experience could be entirely different. Moreover, it may be that children give special meaning to our lives, but that isn���t getting captured by the questions that researchers ask.

That said, I think the whole subject of kids and happiness is fascinating, for three reasons. First, it highlights���yet again���how bad we are at figuring out what will make us happy. Prospective parents are convinced children will enrich their lives. The data suggest otherwise.

Second, having kids is a huge investment. Many���and perhaps most���U.S. parents spend more on their children than they end up saving for their own retirement. The Department of Agriculture estimates it costs almost $234,000 for a middle-class family to raise a child through age 17. If the kid goes on to an in-state university, that would add another $85,000 to the tab.

No doubt some parents will bristle at my description of children as a ���huge investment������which brings me to the third reason I���m fascinated by the debate over kids and happiness. Over the years, I���ve discovered there are two groups you never want to argue with.

The first group: Financial salespeople who are handsomely compensated for pushing particular products. The commissions they collect buy their undying loyalty, and they react with outrage whenever anybody questions the virtue of their overpriced merchandise.

Who���s the second group? That would be folks who have made a major decision and then are belatedly confronted with evidence that their choice wasn���t necessarily the right one. I see this with retirees who have already claimed Social Security���and are now told they would have been better off delaying. I see it with folks who lease cars or buy overly large homes. And I see it with parents who are shown the sorry data on children and happiness.

I first came across such data a dozen years ago. An academic paper charted satisfaction with life, as reported by parents who were approaching their first child���s birth. As the happy day got nearer, reported life satisfaction climbed ever higher���only to come crashing down in the years after the birth. By the time the kids were age three or four, both mothers and fathers were reporting life satisfaction that was significantly below their long-term baseline.

“It seems parental happiness has a lot to do with the amount of work and aggravation involved.”

Indeed, countless studies suggest children either don���t have much impact on happiness or the effect is somewhat negative. One study even found that women rated child care 16th��out of 19 daily activities, putting it just above commuting and just below housework.

Are all parents in denial, insisting that their children are their greatest joy, even as they struggle through one miserable day after another? I think not. Rather, it seems parental happiness has a lot to do with the amount of work and aggravation involved. The least happy parents seem to be those who have young children, are young themselves, are raising kids alone or have children with problems.

Older parents, by contrast, report greater happiness. That might be because the parents are more emotionally mature. But it could also reflect their stronger finances: Raising children is less of a financial strain than it is for younger parents.

That brings me to an intriguing study that looked at 22 countries. It found wide disparities in happiness: Parents in Portugal, Hungary, Spain and five other countries were happier than nonparents in those countries. But in the other 14 nations, nonparents were happier. The bad news: The U.S. sat at the bottom of this ranking, just below Ireland and Greece.

What drove differences in national happiness? The study���s authors conclude that the results were heavily influenced by government policies. Parents were happier in those countries with family-friendly laws that mandated such things as paid family leave, subsidized child care, and guaranteed paid sick and vacation days.

In the absence of such policies, you may want to make every effort to get your finances in good shape before you have children, so their arrival doesn���t prove too much of a financial strain. You might also consider living closer to family, who could provide invaluable support.

What if you���re an aspiring grandparent? Offering to subsidize your adult child���s growing family may get you the grandchildren you want. I realize that might sound crass, but it could be a great investment. While the research suggests having children is a mixed blessing, there doesn���t seem to be much doubt about grandchildren: They���re a huge boost to happiness.

Latest Blogs

Looking to get your finances in shape before year-end? Adam Grossman suggests seven things to do now.
“We helped an investor who had 45 different mutual funds,” recounts Tony Isola. “Every quarter, they were all sold and replaced with new products as part of some insane strategy.”
Want long-term financial success? Ross Menke��pounds the��table for three principles: bring stability to your income, increase��savings over time and take care of your health.
Yes, you can earn an average income and still amass $3 million by retirement. John Lim explains how.
Need to take required minimum distributions from your IRA and 401(k) by year-end? You might want to start now���because it could take that long to get your recordkeeper to act, says��Richard Quinn.
“It���s a relief to go from guessing my cash flow to having a good idea of what will be left at the end of two weeks,” writes Lucinda Karter.��“I know how generous a person I can be, which���alas���isn���t as generous as I once thought.”
November’s most popular blogs were devoted to the slumping stock market. But those weren’t the only articles that caught the attention of HumbleDollar���s readers.
Aiming to trim your taxes? “This is the time of year to act or not act���depending on whether you think your tax bracket will be higher or lower in 2019,” advises Julian Block.
Wall Street makes good money if it can persuade everyday investors that they’re clueless���and yet it’s the “professionals” who are failing to act like long-term investors.
“What you teach your children through your actions could be with them for their entire life,” writes Dennis Friedman. “Tempted to overspend on a luxury item? Just remember, your children are watching.”
Have you built up a hefty nest egg that you hope to pass to the next generation? To make sure they’re ready,��Ross Menke��suggests four steps.
Feel like stock prices are jumping around too much? Adam Grossman fingers a likely culprit: momentum investors.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Taking Us for Fools,�� The View From Here ��and�� A Little Perspective . Jonathan’s latest book:��From Here to��Financial��Happiness.

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Now or Later?

WANT TO CUT your tax bill for this year and next? The main thing is to act���or not act���before Dec. 31, while there���s still time to take advantage of tax angles that can generate dramatic savings.

Once we���re beyond Dec. 31, it���s generally too late to do anything but file Form 1040 on the basis of what took place the preceding year. There are a few exceptions. For instance, in early 2019, you can still make deductible contribu��tions to some tax-deferred retirement accounts, such as traditional IRAs, SEPs (simplified employee pension plans) and other plans that reduce taxes for the prior year.

What should you do before year-end? There���s the obvious: Aim to make maximum contributions to your employer���s 401(k) or 403(b) plan. But you should also think about whether your tax bracket will be higher or lower in 2019���and hence whether you want to shift taxable income or deductions into next year or generate them in 2018.

Consider an example. The law allows individuals who buy EE savings bonds to postpone reporting the interest income until they cash in the bonds or the bonds mature. The interest is also exempt from state taxes���a real advantage for those in high-tax states like California, Connecticut, Hawaii, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Vermont.

This option to defer provides savings bond owners with some valuable leeway in reporting their interest. With careful planning, the deferral can become the equivalent of an exemption from taxes.

Let���s say middle-incomers Joe and Josephine Seispack expect to fall from the 22% bracket for 2018 (taxable income between $77,400 and $165,000) to the 12% bracket for 2019 (taxable income between $19,400 and $78,900). Why the descent to a lower bracket in 2019? Joe or Josephine might no longer moonlight at a second job, or perhaps they decide to take early retirement.

The Seispacks tell me that they intend to redeem some EEs and use the accumulated interest for their spring vacation. I remind them that when��they redeem hurts or helps. Suppose they pay no attention to the calendar and remove $5,000 of the accumulation before Dec. 31. The IRS takes $1,100���or 22%���and the couple keeps $3,900. What if they bide their time until after Dec. 31? The IRS���s share decreases to $600, or 12%, and their vacation kitty increases to $4,400.

Timing the sale of savings bonds is just the beginning. There���s a host of ways to shift taxable income from one year to the next. Got a winning stock you want to sell or a tax loss you want to realize? Contemplating a large charitable contribution? Are you a freelancer who plans to buy a new laptop that���ll count as a deductible business expense? Do you have customers you need to bill? This is the time of year to act or not act���depending on whether you think your tax bracket will be higher or lower in 2019.

Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Good Old Days, Two’s a Crowd and Stepping Up. Information about his books is available at JulianBlockTaxExpert.com. Follow�� Julian on Twitter��@BlockJulian.

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Grab the Roadmap

FINANCIAL SECURITY is within your reach. Don���t believe me? Here���s a roadmap that demonstrates it���s possible for most Americans.

Sam is a 22-year-old college graduate. He begins working right after college, earning $50,000 a year. He saves 20% of his income the first year, equal to $10,000. Each year, he gets a 2% raise. This raise is over and above inflation, which we���ll assume is zero to keep things simple. In addition to saving $10,000 a year, he takes half his annual raise and also socks that away.

For example, in his second year on the job, his salary increases from $50,000 to $51,000. He takes half the raise, or $500, and adds that to his annual savings of $10,000, so he saves $10,500. He continues in this manner year after year. Since he���s saving half of each year���s raise, his savings rate slowly increases, reaching 25% at age 32 and 30% at age 43. Sam also consistently invests his savings, getting a long-term average annual return of 6.2%. More on that number later.

Meanwhile, Sam���s standard of living isn���t stagnant. His annual spending rises from $40,000 right after college to $50,000 by age 40 to a little over $60,000 by age 53.

What���s happening to his nest egg? By age 49, Sam has become a millionaire. The year before he became a millionaire, Sam���s cost of living was $56,000. That means, if he retired at 49 and wanted to maintain his current standard of living, he would need to draw 5.6% from his nest egg.

Sam is a conservative guy and thinks 5.6% is too high. Maybe he could swap to a less stressful job with more time off, taking a 50% pay cut in the process. Since he made $82,000 the previous year, a 50% pay cut would mean an income of $41,000. Now, he only needs to draw $15,000 from his nest egg to maintain his $56,000 lifestyle, which would equate to a 1.5% withdrawal rate. That sounds a lot better.

While it sure feels good to know he has options, 49-year-old Sam isn���t quite ready to throw in the towel. He continues to work and save as he���s been doing. Nine years later, at age 58, his nest egg has grown to $2,108,000. Sam is now seriously contemplating a career change or maybe even outright retirement. Can he pull the trigger? You bet. If Sam were to withdraw 4% of his nest egg���based on the popular 4% rule���that would equate to an annual income of a little over $84,000. That���s $20,000 more than he spent the previous year. Not only can Sam retire, but also he could seriously upgrade his lifestyle.

Notice that it took Sam 27 years to become a millionaire, but only nine additional years to reach $2 million. Any guess on how many years it would take Sam to get to $3 million? Just five years. These numbers demonstrate the power of compound interest. Even if Sam stopped saving once he became a millionaire at age 49, his nest egg would still grow to $2 million. Instead of taking nine years, it would take 12 years���just three years longer.

Are my assumptions realistic? The first set of assumptions are largely outside of our control. I call these the��financial��assumptions:

Sam had a starting income of $50,000 a year. As it happens, the average starting salary for a bachelor���s degree graduate was just over $50,000 for the last three years, according to the National Association of Colleges and Employers. Median household income reported by the U.S. Census Bureau for 2016 was $59,039.
Sam���s income grew 2% each year. Median wage growth since 1983 has been 4% a year. Subtract 2% inflation and you get 2% real��income growth.
Sam���s savings collected an average annual return of 6.2%. This number comes from assuming an 80% stock-20% bond portfolio and using real��long-term rates of return of 7% for stocks and 3% for bonds. While we���ve enjoyed such performance historically, there���s a good chance returns will be lower going forward. But that doesn���t change our story much���because what drives Sam���s success, more than anything, is his savings habits.

The second set of assumptions are largely within our control.�� They are what I call the personal��assumptions:

Sam begins to save at age 22, which is the age many young adults graduate from four-year colleges.
Sam saves 20% of his income right off the bat.
Sam takes half of every annual raise and adds it to his yearly savings.

I can already hear the objections: ���Save 20% or more of my income? Get real. Maybe you can do that if you���re making a six-figure income, but otherwise you���re out of your mind. I can barely make ends meet living on $50,000.���

Here���s my rebuttal: If $50,000 covers the bare necessities of life, how are those earning $40,000 surviving? Alternatively, what about those families earning $62,500? Surely they can live off 80% of their income���which would be $50,000���and save 20%? My point: Saving 20% of your income is never easy, because it means denying yourself things that you have the means to obtain right now.

But what���s the alternative? The savings rate has hovered around 6% recently. If we run the same scenario as before, but change the savings rate to 6% and the name to Frank, here���s what we find:

Frank reaches the $1 million mark at age 69 and $2 million at age 80.
If Frank retires at 69 and uses the 4% rule, he would have annual income of $41,000. Just before quitting the workforce, however, he had been spending $116,000 a year.

The bleak reality: A 6% savings rate means the financial milestones take many more years to reach. Frank waits two decades longer to become a millionaire. Even worse, the low savings rate equates to a higher spending rate, meaning Frank is faced with a difficult decision at age 69. He can retire and massively downgrade his standard of living���or he can keep working.

Will you be a Sam or a Frank? Just remember the truism that applies not just to personal finance, but to all walks of life: You can have it easier now and harder later���or harder now and easier later. What about easier now and easier later? Lots of folks behave like that���s a choice, but it isn���t.

John Lim is a physician who is working on a finance book geared toward children. His previous blogs��were Bearing Gifts and�� Lay Down the Law . Follow John on Twitter @JohnTLim .

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Keeping It Going

AFTER YOU���VE become successful and accumulated wealth, what comes next? Americans are facing this question more often than ever before. CNBC��notes that the number of millionaire U.S. households grew by more than 700,000 in 2017. This affluence can create a disconnect between parent and child: One generation created the wealth, while the other grows up surrounded by it.

As a financial planner, I���ve learned the younger generation has two options: They can either destroy the wealth or they can add to the family���s legacy. It���s challenging enough to raise your children to become a contributing member of society. Wealthy families have additional complexities to address: There���s a balancing act between teaching children the responsibilities of maintaining wealth and allowing them the freedom to grow on their own.

Instead of simply teaching lessons to the younger generation, the family must work together as a team. It���s this collective effort that will help the family maintain its wealth for generations to come. What���s involved? Families should focus their efforts on four key areas. Don���t consider yourself wealthy? I think these strategies can also be valuable for less affluent families hoping to raise their children to become money-smart adults.

1. Teach stewardship.��The older generation has a responsibility to teach the benefits of wealth to their children. At what age do you start? I believe these conversations can begin as young as age four or five. Family dinners present the opportunity to communicate the family���s values. Work ethic can also be discussed. But more important, you show work ethic by example.

As your children grow older, they can be invited to your workplace, and be involved in both family meetings and meetings with your professional advisors. These experiences help them understand the family legacy and become stewards of its wealth.

2. Share financial information.��For the next generation to succeed, they need to appreciate what���s at stake. Do they need to know all the financial details? No. But they need to know the nature of the family���s wealth. From this, they can develop the skills and desire needed to properly manage and add to the legacy.

A family retreat is an effective way to share the family���s finances. They can be presented in a formal manner, with opportunity for interactive discussion. Meetings should include family members of all ages, to avoid anyone feeling left out.

3. Encourage community service.��If you own a small business, you���re already providing a service to your community. In a small town, the family business that employs 50 people may be more valuable than any community service project that family members could ever undertake.

That said, more formal community service should also be encouraged. This will allow the younger generation to have an impact in areas they feel passionate about. Consider projects that allow you to participate as a family. But also let your children get involved in service projects on their own.

4. Continue the legacy.��As a family extends into the third or fourth generation, cousins will spend limited time with each other. A commitment to philanthropy can keep a family together for yet another generation. Starting a family foundation or donor-advised fund is a great place to begin. To be involved, each family member must contribute through monetary gifts and serving on the board. This helps everyone come together for a greater purpose.

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. His previous blogs include Flying Solo, Money Date Night and That Extra Step. Follow Ross on Twitter @RossVMenke.

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First Impressions

WHEN I WAS age six or seven, an older man came to our house. My mother answered the door. I couldn’t hear what the man was saying, but my mother mentioned the word ���garage.��� I then followed her to the kitchen and watched her make a sandwich with white bread, sliced bananas and mayonnaise. She then poured a glass of milk and went to the garage.

There, sitting in a lawn chair in our tiny garage, was that man. She gave him the sandwich and milk. As I stared at this man, it was the first time I realized that people went hungry in our country.

I think the reason I have such a sympathetic view of the homeless is because I remember how my mother treated that man. Maybe, if she had been hostile toward him, I might have a different view today.

As a young adult, one of my first investments was a company that went bankrupt. I lost almost all my money. Since that early, failed investment, I have been a conservative investor with a lower-than-recommended percentage of my portfolio in stocks.

Just as my initial investment experience influenced my lifetime behavior, it seems today���s young adults have been scarred by the 2007-09 bear market. According to Barron’s, “An average of just 31% of people ages 18 to 29 held stocks from 2009 to 2017, versus 42% in that age cohort in the years from 2001 to 2008, according to Gallup.”

Jamie Cox, managing partner of Harris Financial Group, commented for the article: “I think the younger people have a more emotional hesitance toward investing than the older people. Your behavior is shaped early in your career.”

First impressions or experiences are hard to dispel, especially those that occur at a young age. They can affect you for the rest of your life. They can withstand the test of time, as if etched and burned into your brain.

I remember the combination of my first lock in the seventh grade: 36, 18, 8. Ask me about my first car? It was a two-tone 1956 Chevrolet Bel Air with a big steering wheel, two-speed automatic powerglide transmission, V8�� 265-cubic-inch engine, radio with vacuum tubes, gas cap in the rear tail light, back seat with a tear on the right side, glasspack muffler, air shocks on the rear suspension, oversized tires at the back and undersized tires on the front end. I can go on and on describing that car. Ask me about my other cars and I wouldn���t have much to say.

One reason first impressions or experiences are tough to shake: Most people get their information from news outlets and people who reaffirm their beliefs. If you watch Fox News, you probably also read a conservative newspaper and listen to a conservative radio station. If you watch MSNBC, you probably read a progressive newspaper and listen to a progressive radio station. Most of us are essentially getting our information from the same source. Result: We aren���t challenging our first impressions or experiences.

Why is all of this important? If you want your children to have a secure financial life, it starts with you as a parent. The most influential finance teacher your children will have is not their high school or college instructor, it’s you���mom and dad. Your children are watching your financial behavior, just as I watched my mother help that man in our garage. What you teach your children about saving and investing through your actions could be with them for their entire life. Tempted to overspend on a luxury item? Just remember, your children are watching.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include��Family Inc.,�� Creative Destruction ,�� Taking Inventory ��and�� A Word of Advice .

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November’s Hits

NO SURPRISE:��The most popular blogs on HumbleDollar last month were those devoted to the slumping stock market. But not everybody was obsessing over share prices. Three of November’s top seven blogs were focused on family financial issues:

Just Asking
A Little Perspective
Simple Isn’t Easy
Five Messy Steps
Taking Their Money
Why Wait?
Family Inc.

The site’s most widely read article in November wasn’t one of our blogs. Instead, it was��Fanning the Flames, our newsletter article that discussed the Financial Independence/Retire Early, or FIRE, movement.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include Taking Us for Fools,�� The View From Here ��and�� A Little Perspective . Jonathan’s latest book:��From Here to��Financial��Happiness.

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Pushing Prices

WITH INCREASING frequency over the past month, I���ve been hearing the question, ���Why does the stock market keep going down? I understand��why the market dipped��when the Fed raised interest rates, but why does it��keep going down��day after day?���

If you’ve been feeling unnerved by recent headlines, you aren���t alone. After gaining 10% in 2018 through late-September, the U.S. stock market reversed course and gave up that entire 10% over the course of just two months, before rallying modestly over the past week. And that’s just the average. Many individual stocks, including Apple and Netflix, have done far worse, down more than 20% in recent months. In short, it’s been an unpleasant year���and it isn’t over yet.

At times like this, in an effort to provide some explanation, investment advisors typically trot out a well-worn quote from Warren Buffett’s mentor, Benjamin Graham. In the short run, Graham said, the stock market is like a ���voting machine,��� but in the long run it���s a ���weighing machine.��� In other words, stock market investors are fickle. From time to time, they will push stock prices to irrational highs or lows. But over time, they act more rationally and, when they do, stock prices will fall back in line with reality. The message: Don’t worry, this too shall pass.

While I generally agree with this way of looking at the market, I believe there���s a third factor influencing stock prices today���one that wasn’t a significant factor in Graham’s time. That factor is momentum trading.

As the name suggests, momentum trading is based on the straightforward assumption that stock price movements don’t happen all at once. They tend to move in stretches���sometimes up and sometimes down. For example, when a company releases a quarterly earnings report that tops investors’ expectations, that company’s stock will tend to rise over a period of several days. The first day might see the biggest move, but a positive trend often continues well beyond that.

Why is this the case? Suppose a company issues an earnings press release on Tuesday at 5 pm. At that point, the news is out there. But it still takes time for investment analysts to write up their reports, and then more time for investors to read and digest this information, before deciding whether to trade the stock.

Moreover, investors don’t all react at the same time. Hedge funds, for example, might place their trades within seconds of receiving a press release, while mutual funds might trade a day or two later. And individual investors might not react until several days or weeks after that. This is what causes stock prices to exhibit ongoing momentum.

We���ve long seen this sort of momentum in stock prices. What’s changed? An increasing number of investment firms have launched funds to take advantage of this momentum effect. These momentum funds scour the market, looking for stocks that are displaying strong directional moves. When they find them, they effectively jump on the bandwagon, buying stocks that are going up and selling stocks that are going down. While it���s difficult to quantify, these momentum funds amplify the market’s ups and downs by bidding up stocks that are already going up and putting downward pressure on shares that are already headed lower.

Momentum strategies have been around since the early 1990s, but they are gaining in popularity. While they used to be the relatively obscure purview of professional investors, major fund companies are now promoting momentum strategies to individual investors. Of particular note, industry leader Vanguard Group��launched��a momentum fund earlier this year. Given Vanguard���s reach, I assume it���ll only be a matter of time before this fund accumulates significant assets, contributing further to the amplification effect I described above.

When the market is going down, it���s natural to worry. That is why I think it’s so important to understand���as much as possible���why the market is doing what it’s doing. My hope: You���ll sleep easier when you know what forces are at work pushing the prices of your investments up and down.

One final note: You may be wondering whether it would be worth allocating a portion of your portfolio to one of these momentum funds. In other words, if you can’t beat ’em, should you join ’em? My answer is ���no.��� Their performance is inconsistent and unconvincing to me. They���re also more volatile and more expensive than standard, broadly diversified funds.

Adam M. Grossman���s previous blogs��include Counting Down,��Deadly Serious��and��Five Messy Steps . 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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Taking Us for Fools

IF THE STOCK market decline resumes, we���ll soon be reading articles about remorseful everyday investors bemoaning their earlier foolishness.

No doubt some folks have been foolish. Perhaps they���ve belatedly discovered that Amazon and Apple aren���t one-way tickets to wealth, that they aren���t the investment geniuses they imagined, or that they misjudged their courageousness and shouldn���t be 100% in stocks.

But mostly, I view these articles as patronizing garbage that propagate the myth that all amateur investors are clueless and all professionals are super-savvy. What���s the truth? It���s a lot messier than Wall Street would like you to believe. Consider four points:

1. Professionals have an incentive to disparage ordinary investors.

General Motors doesn���t dismiss drivers as hopelessly incompetent. McDonald���s doesn���t joke about obese, calorie-crazed customers. Cable channels don���t mock the viewing habits of their subscribers. But on Wall Street, belittling clients is considered fair game.

Why? It���s a storyline Wall Street loves. If it can persuade individuals that they���re foolish and best served by professionals peddling sophistication, the Street has itself a double win: It can charge investors for high-priced handholding���and it can sell them overly expensive, over-engineered financial products.

2. Professionals have shorter time horizons.

You���ll likely make good money If you hold a globally diversified stock portfolio for the next 10 years. Even if we get a recession in, say, 2020, the economy will soon start growing again, corporate profits will rise and share prices will follow suit.

Indeed, historically, there have been very few 10-year periods when stocks haven���t posted gains. The good news: Most of us have at least a 10-year time horizon. Even 65-year-olds should have plenty of time to ride out a market decline���and their heirs almost certainly do.

That brings us to an obvious question: If we can be reasonably confident that results will be decent over the next 10 years, why would anybody fret over the next 12 months? I can imagine three groups who potentially would be concerned.

First, there are those who have made the mistake of keeping money in stocks that they���ll need to spend soon. Second, there are those who have recently realized they���re uncomfortable investing so much in stocks.

Who���s the third group? That would be professional money managers. Unlike the typical amateur investor, you���ve got to imagine they���re extremely concerned about performance over the next 12 months���because their paycheck depends on it. I���m not saying the typical Wall Street professional has been selling shares in a panic for the past two months. But let���s face it: They, more than anybody, have an incentive to limit short-term losses by dumping stocks.

3. Professionals drive stock prices.

In terms of setting stock prices, it isn���t who owns stocks that matters. Instead, it���s who trades them���and professionals likely account for well over 90% of the stock market���s trading volume. High frequency trading alone accounts for about half of U.S. trading. Make no mistake: The U.S. stock market is down 6% from September���s all-time high because professionals are selling, not you and me.

To be sure, money managers and investment advisors could be dumping stocks because their clients are yanking their accounts or asking them to dial down risk. But that raises the question: If these folks consider themselves savvy professionals, how could they possibly have allowed their clients to invest in a way that clearly doesn���t suit their risk tolerance? That suggests these professionals are anything but.

4. Evidence of amateur incompetence isn���t conclusive.

We are in the 10th��year of the current bull market. But as I noted in a blog earlier this year, there���s scant evidence of investor euphoria. Margin debt���often taken as a sign of overconfidence among individual investors���rose just 0.8% in 2018 through September, when the market peaked. Mutual fund investors pulled $191.3 billion out of U.S. stock funds in this year���s first 10 months���hardly a sign of speculative fervor.

But what about the famous Dalbar study, which purports to show that mutual fund investors garner results that are so much worse than the market averages? That���s been trotted out for decades as proof that everyday investors are incompetent���despite the fact that the study���s methodology has been criticized by me in The Wall Street Journal��(2004), the Finance Buff���s Harry Sit (2011), The Wall Street Journal���s��Jason Zweig (2014), Michael Edesess et al (2014) and the American College���s Wade Pfau (2017), prompting some fiery responses from Dalbar.

And yet financial firms continue to publicize the Dalbar results. Why? Ladies and Gentlemen, kindly direct your attention to point No. 1.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . His most recent articles include The View From Here,��A Little Perspective��and��Simple Isn’t Easy. Jonathan’s latest book: From Here to Financial Happiness.

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