Jonathan Clements's Blog, page 389

Price Still Slight

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

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

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

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

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

Fidelity 500 Index Fund

Annual Expenses: 0.015%
2018 Return: -4.40%

iShares Core S&P 500 ETF

Annual Expenses: 0.04%
2018 Return: -4.42%

Schwab S&P 500 Index Fund

Annual Expenses: 0.02%
2018 Return: -4.42%

Vanguard 500 Index Fund Admiral Shares

Annual Expenses: 0.04%
2018 Return: -4.43%

Vanguard S&P 500 ETF

Annual Expenses: 0.04%
2018 Return: -4.42%

S&P 500’s 2018 Total Return: -4.38%

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

Fidelity U.S. Bond Index Fund

Annual Expenses: 0.025%
2018 Return: +0.03%

iShares Core U.S. Aggregate Bond ETF

Annual Expenses: 0.05%
2018 Return: -0.05%

Schwab U.S. Aggregate Bond ETF

Annual Expenses: 0.04%
2018 Return: -0.09%

Schwab U.S. Aggregate Bond Index Fund

Annual Expenses: 0.04%
2018 Return: -0.12%

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

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

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

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

Fidelity Total Market Index Fund

Annual Expenses: 0.015%
2018 Return: -5.28%

Schwab Total Stock Market Index Fund

Annual Expenses: 0.03%
2018 Return: -5.30%

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

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

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

Fidelity Global ex U.S. Index Fund

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

iShares Core MSCI Total International Stock ETF

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

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

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

Schwab U.S. Broad Market ETF

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

SPDR Portfolio Total Stock Market ETF

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

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

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

Vanguard Total International Stock ETF

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

Vanguard Total Stock Market ETF

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

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

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

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

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

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

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

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Picture This

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

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

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

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

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

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

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

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

Ross Menke is a certified financial planner and the founder of Lyndale Financial , a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross���s previous blogs include��Rewriting the Script,�� Paper Chase ,�� Start Small ��and�� Never Retire . Follow Ross on Twitter @RossVMenke .

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Gaming the System

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

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

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

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

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

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

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

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

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

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Still Learning

FOR THE BETTER part of 40 years, I spent a great deal of time helping thousands of workers prepare for retirement. We ran seminars for workers and spouses on topics like retirement income, insurance, lifestyle, relocation and more. I think it���s fair to say that, if someone took advantage of the programs offered, they would have been well prepared financially and emotionally for retirement.

Sadly, relatively few workers utilized all that was available to them���this despite the support and urging of the unions that represented them. I retired in 2010, suffering in part from banging-your-head-against-the-wall syndrome.

Since then, I���ve learned a great deal more about retirement, both from my own experience and from others. Here are my top 10 lessons:

No matter how well you���ve prepared and how generous your sources of retirement income, money is always on your mind. For some reason, I���ve found the financial ���what ifs��� still stare us in the face. Perhaps it���s because we know there are no do-overs and hence our financial resources are finite.
I am convinced that, once retired, the ability to rebuild savings remains essential. You cannot handle a significant, unexpected expense from your main retirement savings without jeopardizing your financial future. That means you need emergency money, outside of your regular retirement plan, and you need to replenish that fund if it���s used.
In the old days, we used to tell employees about the three-legged stool of retirement income: company pension, Social Security and personal savings. Today, the stool has different legs. For most Americans in the private sector, there���s no company pension and instead only a 401(k) plan. The new legs are now employer plan savings, Social Security and other savings. Since retiring, I better appreciate the value of having substantial savings, beyond what you accumulate in your employer���s plan.
Maintaining your lifestyle isn���t as easy as it looks. After nine years, I���ve maintained mine. But that���s only been possible because of a measure of frugality, coupled with my goal of retiring with enough income to replicate 100% of my base salary, rather than the standard advice to aim for 80%.
Inflation is real. For many people, health care spending, property taxes and rent will be the big inflation concerns. There���s no escaping inflation, so you need to plan. I would suggest having a pool of money that you leave untouched and allow to grow, until you need it later in retirement to offset increasing expenses.
The transition to retirement isn���t easy. I found it very hard to let go of my professional life. For instance, I used to be invited to speak at conferences around the country, staying in top resorts. In a blink of an eye, that was gone.
Busy or bored? It���s your choice. When I asked folks���who were about to retire���what they planned to do, typical answers included ���play golf,��� ���fish��� and ���tinker around the house.��� Those aren���t enough. But take heart: You���ll soon be busy. The question is, will you be busy doing what you want to do?
Where did all the ���friends��� go? When you work with people for many years, your relationship with them may seem like it���s about more than just business. But when you retire, and you lose your authority and influence, it can feel like you dropped off the planet. Your true friends will remain. But your value to others will be gone���and so will they. Don���t be surprised.
There is an old saying, ���I married you for better or worse, but not for lunch.��� When I announced I was planning to retire, my wife said, ���Fine, but I���m not changing my activities.��� She hasn���t and nor should she. When you add eight to 12 hours a day to the time you spend with a person, there���s an adjustment. Talk about it.
There is an end to retirement. I don���t want to be maudlin. But before graduating school or college, we look forward to a career. During our career, we look forward to retirement. Once retired, we look forward to waking up.

Okay, it isn���t that bad and it isn���t like the end of the movie is a big secret. Still, when you receive notices of former coworkers passing, it���s a little depressing. Keep calm and carry on.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Healthy Change,��Saving Ourselves��and��Required Irritation.��Follow Dick on Twitter��@QuinnsComments.

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Not Worthless

THE INTERNAL Revenue Code doesn���t authorize much relief for investors when they suffer capital losses that exceed their gains. It allows taxpayers each year to offset the excess against as much as $3,000 of their ordinary income from sources like salaries, pensions and withdrawals from IRAs.

What about the unused losses? The law lets investors carry forward such losses and claim them in an identical way on their tax returns in subsequent years, until they���re used up.

What if investors want to claim capital-loss deductions for stocks or bonds that become worthless because, say, the company involved goes bankrupt and the securities stop trading, so owners can���t even sell their holdings? Taxpayers have to satisfy several requirements.

They���re allowed to write off such losses only if their stocks or bonds become entirely��worthless. Deductions aren���t available merely because their shares are no longer traded on markets and are practically worthless for all intents and purposes.

Let���s say an investor, whom I���ll call Polly, claims a loss that undergoes IRS scrutiny. She should be prepared to establish that there���s no current liquidating value, as well as no potential value.

The Stepford response of an adamant IRS: The lack of a ready market, or the decision of a company to file for bankruptcy, doesn���t mean her shares are worthless.

I caution Polly that it would be premature to uncork the bubbly just because she satisfies those stipulations. Next item on the agenda: timing. She can write off worthless shares only in the year they become worthless.

How is Polly supposed to determine the date she sustained her loss? It���s always the last day of the calendar year. This holds true even if the shares became wholly worthless at the start of the year.

My advice to Polly and anyone else who���s uncertain about the year of worthlessness: Nail down her deduction by claiming it for the first year in which she believes the stock becomes entirely worthless.

What if the IRS contends the loss isn���t allowable for the year she selected, because it wasn���t until a later year that the stock became worthless? She still has time to claim the loss in that year.

Contrast that with what could happen if Polly puts off claiming the loss until a later year and the IRS says worthlessness occurred in an earlier year. It may be too late for her to file a refund claim.

Indeed, the Second Circuit Court of Appeals in New York offered this advice: ���The taxpayer is at times in a very difficult position in determining in what year to claim a loss. The only safe practice, we think, is to claim a loss for the earliest year when it may possibly be allowed and to review the claim in subsequent years if there is any reasonable chance of its being applicable for those years.���

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 Take a Break,��Pay as You Go,��It’s All Relative and��Now or Later. Information about his books is available at JulianBlockTaxExpert.com. Follow�� Julian on Twitter��@BlockJulian.

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Humble Arithmetic

IN THE HISTORY of the investment industry, May 1, 1975, is a date to be celebrated. On that day, the industry took not one, but two, remarkable steps forward.

The first change was an action by the SEC to deregulate stockbrokers. For the first time in more than 100 years, brokers were given the freedom to set their own commission rates on stock trades. The result was a boon for individual investors. Today, instead of paying hundreds of dollars to trade a stock, most investors pay less than $10.

Coincidentally, on that same day, a mutual fund industry veteran named John Bogle launched a new company, which he called the Vanguard Group. Soon after, the company launched a new investment vehicle for everyday investors���the index fund.

Bogle passed away last week, at age 89. In the words of Warren Buffett, ���If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle.��� I couldn’t agree more.

Today, Vanguard is the industry leader, entrusted with $5��trillion��of investor savings, but that success didn’t come easily. In fact, the firm got off to an inauspicious start. As Bogle liked to say, the opportunity to start Vanguard came only when he was ���fired with enthusiasm��� from another company. Even with Vanguard up and running, it took time for the index fund concept to catch on.

Bogle’s idea was simple: Instead of wasting time and money trying to pick the��best��stocks to include in a fund, just own��all��the stocks and pass the savings along to investors. As Bogle put it, ���Strip all the baloney out, and give people what you promise.��� It was a deceptively simple formula for success.

Despite that simplicity, it was an uphill battle. Upton Sinclair once wrote, ���It is difficult to get a man to understand something when his salary depends upon his��not��understanding it.��� Not surprisingly, competitors were doggedly critical.

Shortly after Vanguard’s launch, Fidelity Investments��� then-chairman, Edward ���Ned��� Johnson, derided the concept of an index fund, saying, ���I can���t believe that the great mass of investors are going to be satisfied with an ultimate goal of just achieving average returns.��� Other fund companies distributed literature accusing index funds of being ���un-American.��� Some called Bogle a communist or a traitor.

While the critics were relentless, Bogle had the data on his side. As early as the 1930s,��research��was beginning to show that the odds were stacked against fund managers trying to beat the market. By the mid-1970s, even the father of investment analysis, Benjamin Graham, acknowledged that stock-picking wasn’t as effective as it had earlier been. In a 1976��interview, Graham was asked whether he believed in ���careful study of and selectivity among different issues��� ��� in other words, stock picking. His answer: ���In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.���

In the decades since, the��data continued to pile up in Bogle’s favor. Recognizing that they couldn’t beat him, many of his earlier critics acceded to what Bogle called ���the relentless rules of humble arithmetic��� and decided to join him, launching their own index funds.

Throughout the years, Bogle seemed to persevere despite all odds, including his own health. Starting at age 31, he suffered a series of six heart attacks. By 37, his doctor advised him to retire. Bogle responded by switching doctors.

Perhaps the most remarkable aspect of Bogle’s life: When he set up Vanguard, he chose a unique mutual structure, meaning that Bogle had no ownership stake. Instead, the company is owned by its customers. It���s still the only investment firm with this structure. Had he not made this choice, Bogle would easily have been among the wealthiest Americans. But he was proud that he wasn���t.

In 2005, Nobel laureate Paul Samuelson said, ���The creation of the first index fund by John Bogle was the equivalent of the invention of the wheel and the alphabet.��� That may be overstating it���but not by much.

Adam M. Grossman���s previous blogs��include Repeat for Emphasis,��Apple Dunking��and��Intuitively Wrong . 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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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.

The post Newsletter No. 41 appeared first on HumbleDollar.

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.

The post Choosing Our Future appeared first on HumbleDollar.

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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