Jonathan Clements's Blog, page 389

That’s Rich

I FEEL WEALTHY. I spent the morning in an upscale shopping mall where, as you stroll along, you can see Bentleys on display. Even the store clerks are a bit snooty. Once I was shopping for a gift and the clerk asked if I could afford the handbag I was considering. I guess, on that occasion, I didn’t look wealthy enough.

When I go shopping with my wife, I don’t feel wealthy. Instead, all I see are items we shouldn’t buy. Shopping seems to have a different meaning for my wife and me. I go to buy something. I walk in the store, head for the item, buy it and rapidly leave.

When my wife goes shopping, she walks into the store and immediately stops at the first display she sees. She came to buy mascara. Why is she looking at shoes? Between the entrance and the cosmetic counter, there are any number of stops. “Just looking,” she claims. I wish.

The meandering doesn’t stop. We end up on every floor in the store. How is buying something on sale, which you don’t need, saving money? Whenever I hear the word “shopping,” I enter my cheapskate mode. But guess what? The urge to buy more than just the necessities is strong in everyone. It’s why many people can’t afford to save. It’s why the $20 co-pay at the doctor’s office is often described as “unaffordable.”

This morning, I passed two people on the street asking for money. I felt too wealthy, even guilty. How you feel about money and your wealth, especially what you have or don’t have, is important. It affects how you feel about yourself and about others, and how you manage your money and your life.

Tomorrow, I may not feel wealthy if the stock market takes a dive. I need to follow my own advice, and stop looking at each investment and at my 401(k) so often. “Stop telling me how much money you lost today,” my wife cries. “You didn’t lose anything.”

When I was working, I got to hang around wealthy people, the kind who order a custom yacht and belong to several country clubs. I didn’t feel wealthy then. At times, I felt rather like a failure. When I was younger, I hoped I would never get a hole-in-one on the golf course, because I couldn’t afford a round of drinks. Spending time with some of these folks also taught me money isn’t everything. Really wealthy people have money, but also class and dignity. I always viewed being wealthy as being financially secure, even in the face of emergencies, and not so much about having lots of stuff. Being wealthy meant the ability to purchase stuff, but resisting in favor of higher priorities.

When I’m sitting on the deck at my vacation home, I feel almost wealthy. Then I drive to a waterfront section of town with mega-mansions and I feel poor. Given that I just mentioned owning a vacation home, even using the word “poor” is highly inappropriate. But it points out how our feelings about money hinge on how we stand relative to others.

I recently had dinner with friends who give the appearance of being quite well-off and have for many years, but who told me they applied for property tax relief. I’m not sure how I feel about that. In prior years, they told me they didn’t believe in stocks and bonds or any of “that stuff.”

I met a young lady while having coffee and we began talking. She was looking for a new job to boost her income and advance her career. In the course of talking, we hit on that old paycheck-to-paycheck thing and she mentioned she is lucky to have $8 in the bank at the end of the pay period. You can imagine how I felt—I had just finished telling her about my last trip to Europe. Sometimes, a good sense of another person’s financial reality is just what we need to stay grounded.

The median household income in the U.S. is around $59,000. But that’s income. What about wealth? Do we even know what wealthy is? Americans say it would take $2.4 million to be considered truly wealthy, according to a Charles Schwab survey. In reality, only 5% of Americans come close to that definition of wealthy. Many more just live like they have that much money.

Oh well, time to check my 401(k) balance. I wonder how I’ll feel today?

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Sharing the Load, Family Resemblance and Late Start. Follow Dick on Twitter @QuinnsComments.

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Job One

USING HIS CONTACTS and connections, our son landed an interview with a New York City health-care system. He was hired as a business analyst and started work in August 2016.

Along with his roommate—also a graduate from the University of Pennsylvania—our son chose to live in Jersey City, N.J., because it’s cheaper than Manhattan, plus his roommate’s job required that he split time between Newark, N.J., and Manhattan. The rent on their 600-square-foot apartment was $2,500, of which our son paid $1,200, since his room was smaller.

He had finished college with $1,600 in his bank account. But that wasn’t enough for the security deposit and first month’s rent, so we loaned him $3,000, which he agreed to pay back after he received his $5,000 signing bonus in September.

A $55,000 salary for a first job would be good money in North Carolina. But it makes for some tight budgeting in the New York metropolitan area. Our son’s $14,400 annual rent constituted 26% of his gross salary, slightly under the suggested maximum of 30%. On top of that, his monthly PATH (Port Authority Trans-Hudson) train pass and a New York City subway pass cost $209 a month.

Food, on the other hand, is actually quite similar in price to North Carolina—as long as you don’t buy it in a restaurant. Our suspicion is that he ate out more than he should have. But it’s quite tempting for a single, 22-year-old to avoid the kitchen, especially if his friends are also avoiding kitchens.

As of today, he and his friend are still roommates. They just moved to their third apartment. (After moving him from North Carolina to his first apartment, the prospect of moving two additional times—hauling furniture up and down four flights of steps—isn’t appealing to me, but it hasn’t deterred him.) Now, they are living in Manhattan. He can easily walk to his office and area grocery stores, and he has a $15-a-month subscription to Citi Bike, so his transportation costs have been significantly reduced.

How has he fared, now that he’s handling his own money? Here’s one indication: Shortly after graduating in 2016, his credit score was an excellent 810. In June 2017, it was 808. Today, it stands at a still healthy 791.

As many have discovered before us, parenting never really comes to an end. But these days, we don’t dispense financial advice—unless our son asks.

Al an Cronk retired after spending 32 years in the newspaper industry as a marketer, editor and writer at the Winston-Salem Journal. This is the seventh and final part of a series about his and his wife’s experience educating their son about money. Previous blogs include Baby Steps, No Laughing Matter, Generating Interest, Getting Carded, No Use and On His Own.

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August’s Hits

LAST MONTH saw more folks visit HumbleDollar than ever before. What were you reading? These were the seven most popular blogs:

Ten Commandments
Low Fidelity
Non Prophet
Bad News
My Favorite Word
Eight Heroes
Two Grandpas

August also saw a slew of readers for a blog that first ran in July, Not So Predictable, as well as for HumbleDollar’s newsletters from early August and mid-August.

Want to help improve HumbleDollar? Please take this brief 11-question survey, which asks about both this site and a new venture I’m working on.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness, will be published Sept. 5 and can now be preordered from Amazon.

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Buy What You Know

KANYE WEST, it turns out, is one heck of an investor. According to a recent analysis, a group of West’s stock picks has beaten the overall market by 40 percentage points this year. It’s an astonishing result. What, if anything, can we learn from his performance?

First, some background: As you may know, West is married to Kim Kardashian, who is one of the dominant personalities on social media, so it was via Instagram that the world gained a window into these investments. Last Christmas, when West presented Kardashian with a gift box filled with stock certificates, she posted some pictures to Instagram. In those pictures, the names of the stocks are visible: Amazon, Adidas, Apple, Disney and Netflix. Since the beginning of this year, all but one has beaten the market by a wide margin. Of particular note, Amazon has gained 64% and Netflix is up more than 80%.

What should we make of this? Decades of research have shown that it’s extremely difficult to do what West did. In fact, the majority of both individual and professional investors fail to beat the market. This has been proven over and over. Yet West’s results seem to fly in the face of that research. As if to further discredit the research, his portfolio makes stock-picking look downright easy. After all, anyone could have observed that Amazon packages and iPhones are everywhere, that kids love Adidas and Disney, and that everyone loves Netflix.

How do we resolve this apparent inconsistency? The research says it’s hard to beat the market and yet Kanye West just did it in spectacular fashion. Is the research wrong—or is West maybe just the exception that proves the rule?

It would be easy to attribute West’s success to luck. The research I’ve cited on investors’ results refers to their performance on average over time. One person’s results over a short six-month period certainly don’t invalidate the research. In fact, this portfolio, comprised almost entirely of high-growth consumer companies, was the perfect fit for today’s booming economy, but it probably would have struggled if the economy had soured.

That said, I’m not willing to simply dismiss West’s results. In fact, there are two elements to his approach that I think you can apply to your own investments.

First, use your expertise to your advantage. Peter Lynch, who for more than a decade managed the world’s top-performing mutual fund, wrote an entire book dedicated to the premise that—when it comes to picking stocks—individuals have a distinct advantage over professionals. I agree. I firmly believe that you should not pay anyone else to pick stocks for you.

As Lynch points out, you can draw on your own expertise in ways that Wall Street pros cannot. “If you’re a surfer, a trucker, a high school dropout, or an eccentric retiree, then you’ve got an edge already,” he says. Exceptional stock-picking success “comes from beyond the boundaries of accepted Wall Street cogitation.”

In Kanye West’s case, he has a business partnership with Adidas. He may also have had unique insights into some of the other companies he chose. You may be able to do the same thing. If you know how to build buildings or design software or perform surgery, you probably have specialized knowledge about companies in your industry that others don’t.

Second, manage risk. Keep in mind that West’s stock purchases totaled about $300,000. For the average person, that’s a lot. But in the context of West’s and Kardashian’s overall assets, it did not represent a great risk. They have multiple businesses and income streams. These stock picks, even if they had failed, would not have impacted them materially.

Don’t get me wrong. I still believe that the best path for investors is to stick to low-cost index funds and to steer clear of stock-picking. But if you want to add a few individual stocks to the mix, be like Kanye: Stick to what you know—and make sure you keep your bets manageable.

This is Adam M. Grossman’s 50th blog for HumbleDollar. His previous blogs include Staying Focused, Eight Heroes and Separated at Birth . 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. 31

STORIES ARE MORE powerful than statistics, which can make for maddening personal-finance conversations. You offer a rational argument, only to have it derailed by your brother-in-law’s anecdotal evidence. Still, two areas of personal finance appear to be more susceptible to reason than others, as I explain in HumbleDollar’s latest newsletter.

Our early September newsletter also includes a plug for my new book and a full list of the blogs published since the last newsletter. When’s the next newsletter? It should go out on Saturday, Sept. 15.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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Tell Us a Story

YOU MENTION to a colleague that longtime smokers shorten their life expectancy by an average of 10 years. Your colleague responds by talking about his grandmother who smoked a pack every day until she died at age 98. We all know that the statistic should trump the anecdote. But on the conversational scoreboard, it’s one point for both sides—and, three weeks later, you can’t help but recall the grandmother’s story.

The same thing happens with personal finance all the time.

It’s often a struggle to get people to agree on how best to analyze key financial questions. What rate of return should we use when weighing whether it’s better to claim Social Security retirement benefits early or late? Should we consider the leverage provided by a mortgage—as well as the interest cost incurred—when assessing the pros and cons of homeownership? What time period should we use when judging the effectiveness of different investment strategies?

But even if we can agree on such issues, the anecdotal riposte is almost always a killer:

House prices have climbed 4.4% a year over the past 40 years, barely ahead of the 3.4% inflation rate. But that compelling statistic is no competition for some crazy tale of skyrocketing San Francisco home prices.
Most retirees fare better financially if they delay claiming Social Security, as long as they live until their early 80s. But that immediately prompts a story about Dad who dropped dead at 67.
Suggest to insurance agents that term insurance is a better bet for most families than a cash-value policy, and they’ll respond with poignant stories about delivering checks to grieving widows—as if that somehow settles the term vs. cash value debate.
Point out that most home improvements are money losers, and your in-laws will start raving about their kitchen upgrade and how they’re sure it’s been a great investment.
Cite statistics showing that more money hasn’t bought greater happiness, and friends will mention how thrilled they are with their new car.
Detail the inevitable failure of most investors to beat the market, and someone will bring up the neighbor who purportedly bought Amazon’s stock at the initial public offering and never sold. What if that doesn’t work? There’s always the favorite fallback position: Simply mention Warren Buffett’s name.

That said, it strikes me that investment discussions—as well as debates over money and happiness—tend to be a tad more thoughtful than other financial arguments. During our lifetime, each of us might own just three or four homes, and we only get to claim Social Security once. Result: We simply don’t have many data points to consider, unless we make a serious effort to research the issue.

By contrast, over our lives, we might make hundreds and perhaps thousands of investment decisions. True, we may fall into various behavioral traps, conveniently forgetting our losers, blaming our bad investments on others and assuming our winners have fared better than they really have. But often, the weight of our many mediocre investment decisions eventually sinks in—and (you were expecting me to say this) the logic of indexing proves irresistible. The $1.6 trillion flowing into U.S. stock index funds over the past decade—and the $1.3 trillion flowing out of actively managed funds—are a testament to that.

Similarly, during the course of our lives, we make thousands of consumer purchases—and the cumulative disappointments take their toll and we gradually become less convinced that money can reliably buy happiness. That’s why we tend to make smarter use of our dollars as we grow older. The young assume that the next possession will bring long-lasting happiness. The old know that the happiness from the latest shopping spree will likely prove fleeting—which is why they shun possessions and instead focus on buying experiences, especially experiences enjoyed with friends and family.

Self-Promotion

MY NEW BOOK officially goes on sale next Wednesday. From Here to Financial Happiness takes readers on a 77-day journey, helping them figure out where they stand, what they want from their money and what they ought to do next. Somedays, the book offers a brief financial lesson. Somedays, you learn about yourself. And somedays, you will need to take a few simple steps. Most day’s reading and activity should devour no more than five or 10 minutes.

I’ve made a slew of tweaks to HumbleDollar.com in recent months—and I’d like to hear your thoughts. If you have a few minutes to spare, please take this 11-question survey. The survey also has a few questions that relate to another venture I’m working on.

Latest Blogs

Who are your financial heroes? Adam Grossman offers his list: Bogle, Buffett, Graham, Klarman, Marks, Odean, Swensen and Taleb.
“The S&P 500 has risen in 73% of the past 100 calendar years,” writes C.J. MacDonald. “Attempting to improve on those odds, by darting in and out of the stock market, is simply not a good bet to make.”
Perhaps we get the government we deserve: Richard Quinn argues we run the federal government the same way most families run their financial lives.
Alan Cronk added his teenage son as an authorized user to three of his credit cards. “Two of the cards went into hiding, and the third went into my wallet,” he writes. “We weren’t about to give a credit card to a 15-year-old.”
Reading a timely article about a sophisticated financial strategy? Gently place the publication in the recycling can and back slowly away.
“What are the three keys to a satisfying retirement?” asks Dennis Friedman. “Financial stability, good health—and good friends.”
Want to build the right portfolio? Adam Grossman suggests asking four key questions.
“While you should usually be free to buy or not buy the things you desire, that doesn’t work with common government services and insurance,” writes Richard Quinn. “You are always part of a risk pool and can’t buy only the coverage you expect to use.”
Can you come out ahead at the casino? Dennis Quillen has—by losing relatively little and collecting “complementaries.” He explains how.
Before Alan Cronk took his son to college, “We insisted that he set up auto-pay on his credit-card account. On the 18th of each month, his credit-card balance was automatically paid in full.”

Jonathan’s previous articles include Bad News, No Place Like Home,  Low Fidelity and Try This at Home. Follow Jonathan on Twitter  @ClementsMoney  and on Facebook .

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On His Own

GETTING INTO COLLEGE is a complicated business—and it doesn’t get less so once your teenager is accepted. There are countless financial challenges and discussions related to tuition, ongoing expenses, buying books, transportation and more. For us, all the logistics were a little more involved, because our son decided to attend the University of Pennsylvania, away from our home state of North Carolina.

In addition to the “big stuff,” we wanted to make sure our son was successful managing his everyday finances. There are lots of ways to do this. We decided that we would pay for his tuition, room, board and health insurance directly. But we said early in the process that he would be responsible for his cell phone bill, buying books, his credit-card bills and any other expenses related to his daily living. And, no, we wouldn’t be providing a monthly allowance.

His only solution was an on-campus job, working 10 to 15 hours a week. We figured our son could handle the extra work, but I realize that isn’t true for all students. For many, a job is a plus, but for others it can mean lower grades.

I was pleasantly surprised to discover that all campus jobs were posted on a website, along with a description, rate of pay, hours and location. These became available over the summer. Our son had interviews scheduled the first day he arrived on campus.

With the job process under control, we turned our attention to a bank account. Our son’s school offered two suggestions: a local credit union and PNC, which has branches throughout the Northeast and North Carolina. We decided to go with PNC, rationalizing that it would make it easier to keep an account with one bank throughout college and maybe into the early years of his professional life.

Opening the account was fairly routine. But there was one thing I didn’t anticipate: I had to be a joint owner. The reason: Our son was still 17 at the time. From my perspective, this turned out to be a good thing. Joint ownership gave me the ability to log into his account. I was worried that this might create tension. He might not want us looking over his shoulder, potentially scrutinizing every transaction.

Thirty or 40 years ago, that might have been the case. But our son had no interest in writing checks. He grew up in a credit-card family. As soon as he turned 18, he applied for his own no-fee American Express credit card—and was accepted, in part—I suspect—because of the efforts we’d made to build up his credit history. Thanks to the credit card, the individual items he bought were hidden from us. The only thing we saw on his PNC statement was the monthly card payment.

We also gave him one of our credit cards, on which he was an authorized user. The purpose was a higher credit limit in case of an emergency. But it came with the caveat: He had to pay us for the items he charged before we paid the credit-card company the next month. In four years, he used the card just once.

Joint ownership of his bank account gave me a 10,000-foot view of his account. I could see specific amounts that were credited to his account, like payment for his campus job, and I could see debit amounts, like paying his credit-card bills. I also saw many Venmo credits and debits. This is the way many college students settle bills with each other. It’s quick, easy and free.

We insisted that he set up auto-pay on his credit-card account. On the 18th of each month, his credit-card balance was automatically paid in full. He had to make sure that he had enough money in the bank to pay the bill. Thankfully, he never overdrew his account. By then, he had fully bought into the idea that credit balances, as well as all other bills, must be paid in full each month. At the end of four years at college, he had a $1,600 balance in his PNC account—and no outstanding debts.

Alan Cronk retired after spending 32 years in the newspaper industry as a marketer, editor and writer at the Winston-Salem Journal. This is the sixth in a series of blogs about his and his wife’s experience educating their child about money. Previous blogs include Baby Steps, No Laughing Matter, Generating Interest, Getting Carded and No Use.

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Sharing the Load

I’M IN THE PROCESS of moving into a 55-plus condo community—in my case, way plus. The property taxes on my new condo will be $12,200 a year, the bulk of which goes toward the local school system. But here’s the thing: No one in the community has children in school and hasn’t for decades. That got me to thinking. Why can’t we just buy the services we need from the town?

Years ago, I felt quite differently. When my children were growing up, I used to think the seniors in town had some nerve voting against the school budget. Today, I better understand that, for some of those seniors, higher taxes meant less for other necessary spending.

It’s a thorny issue. If you’re part of a community—large or small—there needs to be a fair formula for sharing common expenses, even expenses that may never directly benefit you. For example, many Americans are upset with the cost of health insurance. Why should they pay for coverage, especially if they’re young and healthy? The reason: Insurance doesn’t work unless the risk can be spread among nonusers, moderate users and high users.

In the case of health insurance, costs are concentrated among relatively few individuals. About 15% of the U.S. civilian non-institutionalized population had no health care expenditures in 2014, while 5% accounted for over half of health care spending.

Imagine what your premiums would be if only the users of health care carried insurance or people were free to enroll in coverage the day before they entered the hospital. That’s called adverse selection. It’s why employer group medical plans generally require new employees and newly eligible dependents to enroll within 30 days. They need them to pay premiums and share the risk. Similarly, if you don’t enroll in Medicare Part B when you’re initially eligible, you are permanently charged an extra 10% for each 12 months you delay. A penalty also applies under a unique formula for Part D.

We can apply similar logic to Social Security. In just eight years, I have collected in benefits a sum equal to all the payroll taxes paid by me and my employers since I started working in 1955. As time goes by, I’ll be further and further ahead. With all social programs, there are winners and losers, givers and takers. Some Americans collect little or nothing from Social Security, while others collect for decades. Folks can marry just before retiring and collect the same spousal benefit as if they had passed their golden anniversary. What’s fair to one person may seem unfair to another.

While you should usually be free to buy or not buy the things you desire, that doesn’t work with common government services and all forms of insurance, including Social Security, Medicare and private insurance. You are always part of a risk pool and can’t buy only the coverage you expect to use. You’re purchasing yourself a safety net for events that may never happen, such as an unusually long retirement or major medical bills. What if such events do occur? Often, without that safety net, it would be a financial catastrophe.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Family Resemblance, Late Start, Ten Commandments and Running on Empty. Follow Dick on Twitter @QuinnsComments.

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Friendly Reminder

SHORTLY AFTER I retired, my father was diagnosed with lymphoma cancer. I would spend the next three years helping my mother take care of him. After my father passed away, my mother was emotionally devastated and her health started to decline. It has been nine years since I retired, and most of that time has been spent taking care of my parents.

It’s one of the hardest things I’ve ever done. It takes compassion, commitment, patience, understanding, sacrifice, mental toughness and physical endurance. Many others play the same role. According to a Wall Street Journal article, “an estimated 34.2 million people provide unpaid care to those 50 and older.” It has become the new norm, thanks to people living longer.

My mother is 95. She lives in a world she no longer recognizes. She has lost her husband of 67 years. All her family and friends of her generation are gone. She has lost her independence. She needs help with a host of daily activities: transportation, laundry, cooking, medication, money management. More important, she has lost the one person in her life that made her feel safe and secure.

Some people look at my mother’s life and think everything is fine. She has enough money to provide her with the basic necessities of life. Her health is fine, except for lower back and leg pain, which slows her down. But the one thing she craves is companionship. She wants friendship and social contact with the outside world. The happiest time for her is when I take her out for breakfast. We always go to the same restaurant. As a result, she has made friends with the people who work there. She calls them her family. We get a booth by the window, so she can look out, and she is happy as she can be.

That’s why, as I said in a previous blog, that friends are like gold. They can be just as valuable as your retirement savings.

I have tried to encourage my mother to meet other people, so she could cultivate new friends. I took her over to the senior center, in the hope that she would meet people. She did not like going. “Too many old people,” she said.

I thought maybe she might want to go into the same assisted living facility as her next door neighbor. I got the same response. My mother has told me, again and again, that she doesn’t like being around “too many old people.” I can’t tell you how important it is to diversify your friends. You need to have younger friends as you grow older, so you don’t end up in my mother’s situation.

I have learned, from taking care of my mother, that money alone doesn’t guarantee a happy retirement. People are social creatures by nature. They like companionship and intimacy. What are the three keys to a satisfying retirement? Financial stability, good health—and good friends.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include First Responders, Truth Be Told, Mind Games and Looking Forward.

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Staying Focused

MY SONS’ BASKETBALL coach, George, has a favorite expression: He talks about “working through the uglies.” When you’re developing a new skill, he says, you shouldn’t expect to be perfect the first time or even the second. But if you keep working at it, over time there will be progress, “from ugly to not-so-bad to decent to good and then, eventually, to great.” The message is clear: You can’t rush it, you can’t skip steps and you have to start with the basics.

If you’re building an investment portfolio, I’d think about it the same way. At first, don’t worry about making it perfect. Instead, recognize that it’s a process and focus only on the most fundamental questions. Later, you can fret about the details—which particular stock or bond or fund to purchase—but don’t let those details distract you when you’re starting out.

Admittedly, this can be difficult. Investors have always struggled with the “brother-in-law problem”—the friends and relatives who always seem to be bragging about their latest grand-slam stock pick. For folks like this, the route to success consists of exactly one step: finding the next Apple, Alphabet (a.k.a. Google) or Netflix. Each time you see them, they can’t wait to tell you that you ought to be doing the same as them. It can be hard to ignore these folks.

Even within the relatively quiet world of index funds, distractions now exist. Recently, for example, Fidelity Investments made headlines when it announced a new line of index funds that are completely free. Is this a good thing? In theory, yes. But if you’re already invested in another low-cost index fund, choosing one over the other is like splitting hairs. It’s as much of a distraction as your brother-in-law and his purportedly no-lose stock picks.

How do you sidestep these kinds of distractions? Before purchasing an investment, I would ask four questions:

What am I trying to accomplish? Are you saving toward a goal, such as retirement, or have you already amassed your nest egg and now you’re focused on turning it into income? It seems like an obvious question, but the answer will dictate how you allocate your funds among the major investment categories: stocks, bonds, real estate and cash.

According to academic research, your allocation among the major asset classes is the most important investment decision you can make. I would think hard about your mix of stocks and more conservative investments, I would understand the potential downside of the allocation you choose, and I would revisit it whenever there’s a change in your financial situation.

Am I effectively diversified? The key word here is effectively. Remember that investments that are similar in nature tend to move together. Apple and Google, for example, will move in tandem far more than Apple and Hershey or Harley-Davidson. When you build an investment portfolio, it isn’t just the number of investments you own that matters. Rather, it’s the number of different types of investments that will make the biggest difference.

Are my investments tax-efficient? There’s no such thing as a universally “good” investment. There are only investments that are good for you. If you are evaluating an investment, especially on the bond side, be sure that it aligns with your tax status.

Can all of my investments be described as sensible choices? Wall Street loves building complex investment products. But in my view, complexity is your enemy. Whenever financial salespeople try to sell you something—whether it’s a stock, bond, fund, insurance policy or annuity—ask lots of questions. Ask them to explain it to you in plain English. Ask them to explain why they think it’s right for you. Ask them what alternatives they considered and how they chose the particular product they’re recommending. Ask them to spell out all the fees. And finally, ask these salespeople if they own the same thing for themselves.

Adam M. Grossman’s previous blogs include Eight Heroes, Separated at Birth and Non Prophet . 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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