Jonathan Clements's Blog, page 391

Doctor’s Orders

SOME OF MY CLIENTS incur hefty medical expenses for themselves and family members. I tell them not to expect too much help from the IRS when it comes to deducting such expenses—unless the costs are well into five figures.

To deduct medical costs, taxpayers have to forego the standard deduction and instead itemize on Schedule A of Form 1040. Their expenses also have to be for bills that aren’t covered by insurance or reimbursed by employers.

The big hurdle: The expenses have to be sizable. Not only do taxpayers’ total itemized deductions have to exceed 2018’s much higher standard deduction, but also medical expenses are deductible only to the extent that their total in any one year exceeds a specified percentage of adjusted gross income. Congress keeps changing the percentage.

I remind clients that they did get some help from the tax law passed by Congress in December 2017. True, the legislation abolishes or curtails many long-cherished write-offs—for example, exemptions for dependents, and write-offs for property taxes, and state and local income taxes.

But lawmakers included a provision that slightly liberalizes how much can be claimed for medical expenses. They replaced a threshold of 10% with a threshold of 7.5% for 2017 and 2018. The threshold reverts to 10% for the years 2019 through 2025.

More important, amid all the nitpicky tax rules, taxpayers often overlook a key notion: Deductible expenditures include more than just outlays for doctors, hospitals, eyeglasses, hearing aids, insurance premiums and the like. Taxpayers also are entitled to claim payments for medically-mandated home improvements, as well as the installation of special equipment or facilities in their homes.

That doesn’t mean, however, that they’re able to deduct all of their payments for equipment or improvements. Those kinds of payments are allowable only to the extent they exceed increases in the value of their homes.

An example: An allergist advises a child’s parents to install an air cleaning system and other kinds of equipment because the child is asthmatic. The aggregate cost is $20,000. The improvements result in an increase of $15,000 in home value. With those numbers, the parents’ allowable deduction is only $5,000.

Other examples of improvements or equipment that readily pass IRS muster are elevators or bathrooms on lower floors that makes things easier for persons who are arthritic or have heart conditions. More liberal rules apply when doctor-recommended improvements are made by tenants to rental properties—for instance, wheelchair ramps. Renters can claim all of their costs because the improvements don’t boost the value of a dwelling they own. Whether individuals are owners or renters, their deductibles include all of their payments for detachable equipment, such as window air conditioners that relieve medical problems.

The IRS cuts some slack for homeowners when they’re unable to deduct the cost of improvements, because those costs don’t exceed increases in the value of their homes. The agency says they still can deduct amounts spent operating and maintaining equipment. Such expenses might include electricity, repairs and service contracts, as long as the equipment remains medically necessary.

J ulian 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 In Your Debt, Moving Costs and Anti-Social Security. Information about his books is available at JulianBlockTaxExpert.com . Follow  Julian on Twitter @BlockJulian.

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First Responders

MY DOCTOR TOLD ME that my white blood cell count has been trending lower for the past five years. He was concerned there was something going on with my immune system and wanted me to see an oncologist.

The oncologist performed a number of tests and couldn’t find anything that would have caused my condition. He wasn’t concerned about my ability to fight off infections because my absolute neutrophil count was in an acceptable range. He went on to explain that neutrophils are one of the most important types of white blood cell, because they’re a first responder to any infection. They can travel through the walls of blood vessels and tissue to combat injury and illness.

That got me thinking about other parts of my life—and I realized there are financial neutrophils, which also act like first responders. They come in different forms: a financial asset, an insurance policy, your spouse, a best friend. Their job is to combat those unexpected expenses that threaten your financial security. To do this, they need to be readily available, so you can deploy them at a moment’s notice.

According to a 2015 report by the Pew Charitable Trusts, 60% of households experienced one or more financial shocks over the prior 12 months, with the most expensive shock typically costing $2,000. Pew defines a financial shock as an unexpected expense, such as a job loss, injury, illness, death, or a major auto or home expense.

The best first responder against a job loss, as well as an unexpected household or auto expense, would be a six-month cash emergency fund that would cover your living expenses. This would allow you time to find another job and pay for any major repairs. If necessary, you can also use money from a Roth IRA, because you can withdraw your contributions at any time without paying taxes or penalties.

The Kaiser Family Foundation found that 26% of U.S. adults had difficulty paying their medical bills over the prior 12 months. This number includes people who have health insurance. High medical expenses can lead to financial bankruptcy. The best first responders against an injury or illness would be a combination of health insurance, a health savings account, disability insurance and a six-month cash emergency fund.

Here are some other first responders you might deploy when unexpected expenses hit:

Term life insurance offers low-cost financial protection, should your spouse or significant other die.
Home and auto insurance can help protect you from natural disasters, such as floods, fire, earthquakes, hurricanes and tornadoes.
A personal umbrella liability policy provides added protection against legal claims made against you.
A home equity line of credit and a credit card with an available balance can help cover major expenses when you’re short on cash.

And don’t forget family and friends. They can be a valuable resource in protecting you from unexpected costs. According to a Wall Street Journal article, “an estimated 34.2 million people provide unpaid care to those 50 and older. These caregivers, about 95% family, and long the backbone of the nation’s long-term care system, provide an estimated $500 billion worth of free care annually.” Having family and friends nearby, who are willing to provide assistance at times of need, can save you thousands of dollars.

First responders are not intended to grow your portfolio, as a stock would.  Instead, they protect you from sacrificing your financial future for an unexpected major expense. They can also help you avoid bankruptcy. They make you feel safe and secure, offering invaluable peace of mind.

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

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Separated at Birth

IF YOU’RE A FAN of basketball, you may be familiar with the Lopez twins—Brook and Robin. On the surface, they are identical in every way. Both stand seven feet tall. Both went to Stanford University. Both entered the NBA draft in 2008 and both were picked in the first round. Since then, both have enjoyed successful careers.

A casual observer would be hard-pressed to see any difference between the Lopez twins, but there is one: While they are both impressive players, they have different styles and, over the course of his career, Brook has delivered somewhat better performance. This, in turn, has contributed to greater career success. Like all NBA players, both have earned millions, but Brook’s cumulative earnings have been 80% higher than Robin’s.

When it comes to your investments—and especially your retirement accounts—it’s critical to be aware of a similar kind of “twins” problem that could have a material impact on your savings.

As you may know, mutual fund companies use a concept known as “share classes” to charge different investors different prices. Depending on how you purchase a fund and how much of it you purchase, you may pay a higher or lower price. At Vanguard Group, if you want to buy its fund that tracks the S&P 500 Index, you have four choices: Investor Shares, which cost 0.14% per year; Admiral Shares, which cost 0.04%; Institutional Shares which cost 0.035%; and finally, Institutional Plus Shares, which cost just 0.02%. The underlying investments are identical in all four cases. It’s just the price that differs.

Other fund companies use their own terminology to distinguish among share classes. In many cases, you will see Class A, Class B and Class C. Again, the underlying funds are all the same; it’s just the fees that are different.

Altogether, in the U.S., there are approximately 8,000 different mutual funds. But when you add up all the share classes, there are more than 25,000 different fund options available to investors.

This can be confusing, but at least the share class designation is included wherever you see the fund’s name, and ticker symbols are unique to each share class. That allows you to use publicly available data sources, such as Morningstar, to compare funds and share classes.

When it comes to your retirement account, however, it’s more complicated, owing to a growing trend known as Collective Investment Trusts (CITs). In simple terms, a CIT is a private fund established by an investment firm for an individual employer. It will be an exact replica of a fund available to the public. But here’s what’s tricky about them: CIT funds have names that are identical, or nearly identical, to their publicly-traded siblings, but their fee structures are usually very different.

Let’s look at an example—a popular fund called Vanguard Target Retirement 2040. Suppose your employer offered this fund in your company 401(k) and you wanted to research it. You could go to the Vanguard website, where you would find a detailed description of the fund and its holdings. You would also see the available share classes and associated fees. In this fund’s case, you would find it available as Investor Shares, costing 0.15%, or Institutional Shares, for 0.09%. By any standard, either of those fees would be quite reasonable, so you might decide to invest.

But here’s the catch: Your company’s variant of the Vanguard Target Retirement 2040 might be something entirely different. It might be a CIT, with its own customized price, created either by Vanguard or by a third-party record keeper especially for your employer. But it can be hard to know. Since CITs aren’t available to the public, they don’t carry ticker symbols and this makes them impossible to research using the usual publicly available resources.

The impact could be significant. In the case of Vanguard Target Retirement 2040, which is available to the public for either 0.09% or 0.15%, I have seen CIT versions which cost as little as 0.05% and as much as 0.91%. The latter version would have been created by a third-party record keeper, and the cost likely includes a host of “administration” costs. To put it in dollar terms, if you have $100,000 in your account, a 0.05% fee would cost you $50 per year, while a 0.91% fee would cost you $910. And you would incur that cost every year.

In the past, CITs were less of a consideration. In 2011, fewer than half of retirement plans offered them. But, by 2016, that number had risen to two-thirds and they are growing quickly. In some cases, this is a good thing. If you work for one of the companies that is able to offer funds for less than they are available to the public, that’s great. But you’ll need to do your homework. Here are three suggestions:

Check your employer’s plan documentation to be sure you know exactly which variant of each fund it’s offering. Look up the fee on each one. Often, these fees won’t appear on your statement, but they will be in supplementary materials you’re entitled to review.
Recheck your selections periodically—perhaps once a year. That’s because fund companies raise and lower fees from time to time, and you might miss the change within the fine print.
Be especially careful of target-date funds like the Vanguard fund I used as an example here. These funds are popular, because they’re designed to reduce risk over time as you approach retirement. But perhaps because of that popularity, I have noticed in many plans that the target-date funds are among the most expensive options. If that’s the case, it may be possible to purchase the constituent parts for less. To find out, check your employer’s fund menu.

Adam M. Grossman’s previous blogs include Non Prophet,  Stress Test  and  All of the Above . 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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Low Fidelity

WE HAVE FINALLY hit rock-bottom. Last week, Fidelity Investments announced that it was introducing two index funds with zero annual expenses, while also slashing expenses on its other index funds and dropping the required minimum investment on all funds, both actively managed and indexed. All of this raises five key questions.

1. Why is Fidelity doing this? I view Fidelity’s move as both bold and borne of desperation. When I started writing about mutual funds in the last 1980s, Fidelity’s swagger bordered on nauseating, as it relentlessly pedaled a slew of star fund managers, notably Magellan’s Peter Lynch.

But like almost everybody who plays the market-beating game, the odds eventually caught up with the Boston behemoth. Today, its reputation for minting winners is all but forgotten. The upshot: After decades of pooh-poohing index funds, Fidelity has clearly decided they’re its best bet for getting new investor dollars in the door.

2. Is this a bait-and-switch? When Fidelity, iShares and Charles Schwab started slashing expenses on their broad market index funds to compete with Vanguard Group, I initially feared that they were looking to lure unsuspecting investors into their funds and then, once the funds were bloated with assets, they’d jack up the fees. It wouldn’t be the first time this has happened. We’ve seen it before with both money-market funds and S&P 500-index funds.

That’s still a risk, especially if we got a long, brutal bear market that puts pressure on profit margins at fund management companies. But today, I find I’m less concerned. With so many major fund companies engaged in this price war, any company that backtracked on its expense cuts would be tarred and feathered for betraying the trust of fund shareholders—and deservedly so.

Instead, investors need to be leery of a subtler bait-and-switch. Fidelity’s zero- and minimal-cost index funds are open-end mutual funds, not exchange-traded index funds. Why go that route? Fidelity wants folks to open accounts at Fidelity itself, rather than having an account at, say, Schwab and using that to buy a low-cost Fidelity ETF. Fidelity’s hope is to build lifelong relationships with customers, who might start out with index funds that make no money for Fidelity, but end up owning Fidelity’s pricier merchandise. My advice: If you have a fondness for your financial future, stick with the cheap stuff.

3. Is Fidelity’s move significant? It isn’t clear that paying nothing in fund expenses is a whole lot better than paying, say, 0.04%. There are other issues that are also of importance, like skill in replicating the underlying index, which index is tracked, and how much the fund makes from lending out the securities it owns and whether that money is credited to fund shareholders. Earlier this year, I looked at the performance of some major index funds in 2017. Tiny differences in annual expenses didn’t necessarily show up in fund returns.

While Fidelity’s lower expenses may not be significant, I think its scrapping of investment minimums is hugely important. Mutual funds are supposed to be the way for everyday Americans to tap into the financial markets, and yet lately the price of admission has become too steep for my taste. I think it’s great that Fidelity has dropped its investment minimums. Schwab, too, has no required minimum—at least for its index funds—which I also find admirable.

We need to make it easy for folks to get started as investors. Cash-strapped families, who might be deterred by the $1,000-plus minimum required by so many fund companies, now have two great choices.

4. What does all this mean for Vanguard? I have all my investment money at Vanguard. I love that the firm operates its funds at cost and I trust the folks there to act in my best interest. But there’s no doubt that Vanguard is in a bind. Fidelity, iShares and Schwab can only offer super-low-cost index funds because other parts of their business are subsidizing these funds.

Vanguard doesn’t operate that way. It manages each fund at cost. If it were to mimic Fidelity and these other fund companies, it would be forced to subsidize its flagship index funds with its other funds. The fund complex would still be operated at cost, but not each fund—and that would be contrary to what investors expect of Vanguard. The price war among total market index funds is hardly an existential threat to Vanguard, but it does mean the firm may grow a tad slower.

5. Should you move your money to Fidelity? I’m not. In my taxable account at Vanguard, I have funds with large unrealized capital gains and selling would mean big tax bills.

But if I were starting out, I might well favor Fidelity or Schwab over Vanguard, especially if I had a modest sum to invest—and especially if I was investing retirement account money. If either firm jacked up expenses, it would be easy enough to move the money elsewhere, with no taxes owed, thanks to the tax deferral offered by retirement accounts.

As I see it, minimal-cost index funds are sort of like rewards credit cards. If you pay off your balance in full every month, you can collect your cash back and travel points, with those rewards effectively subsidized by folks who foolishly carry a balance. Similarly, Fidelity, Schwab and others are offering the chance to buy low-cost index funds that are effectively subsidized by other investors. If you can resist the temptation to buy the higher-cost merchandise these firms offer, you’ll get your reward—and others will pay the price.

What if everybody opts for the bargain-priced funds? Instead of Vanguard, it would be Fidelity, Schwab and others who would be in a bind. But I don’t think they have much to worry about: An outbreak of rationality doesn’t appear imminent.

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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Say Something

THE LATEST UPGRADE to HumbleDollar: We’ve improved the system used for commenting. Before, if you wanted to comment on the site, you needed a Facebook account—and that triggered a slew of complaints from those who aren’t among Facebook’s 2.2 billion active users.

Now, anybody can comment on HumbleDollar using either an existing account, such as Facebook, Google or Twitter, or by creating a unique username and password. Please check out the new commenting section, which can be found at the bottom of every blog and newsletter, as well as on every page of our money guide.

There was a downside to making the switch: All earlier comments have disappeared. To keep the existing comments, our site developer would have had to transfer them over manually—at considerable cost. Today, HumbleDollar just about breaks even. We’d like to keep it that way.

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Ten Commandments

WE’RE FACED WITH a host of thorny retirement issues: Keep Social Security solvent. Make Medicare affordable. Many Americans aren’t saving enough. They want to retire earlier than they can reasonably afford. They’re effectively financially illiterate.

But in the end, you don’t need to worry about all Americans. Instead, what you need to worry about is you. Want a comfortable retirement? Here are my 10 commandments:

If your preretirement lifestyle is set with a view to what you can sustain after you quit the workforce, you’re likely on track. If not, retirement could mean a sharp drop in living standards.
Remember that Social Security is designed to replace no more than 40% of preretirement income—and for many, that 40% is an overestimate, because the benefit calculation is skewed toward lower income Americans. In retirement, you’ll want some steady sources of income, and Social Security is probably the most secure. But recognize that it’s intended to be a minor part of your total income.
Have a financial and estate plan that provides for your spouse and any others who depend on you financially—and who may outlive you. Income annuities, investment income streams and life insurance might all be part of that plan.
Never forget the non-financial aspects of your retirement are important, too. Think about any significant relocation long before you retire—and consider trying it out first. It’s a big mistake to think of retirement purely as leisure time. And remember, when it comes to the fun stuff, that takes money.
Pay attention to communications from your employer, Social Security, Medicare, personal advisors and others. What you don’t know can hurt you. A missed deadline and any number of other goofs can do severe financial damage.
Put retirement savings ahead of other goals, like college or a vacation home. Unless you have a good pension plus Social Security, it’s mostly up to you—and there are no second chances.
Save as much as possible as soon as possible. You can always reduce your savings rate later. Investment compounding really is powerful. Load up on savings early in your career and let the money work for you in the decades that follow. When money gets tight, such as when paying for the kids’ college, you may need to trim savings for a few years. But if you over-saved during the first 10 years or so of your career, you will likely still reach retirement in good shape.
Recognize that your taxes may not be lower during retirement. All the signs point to higher taxes in the future for everyone. To reduce my retirement tax bill, I favor Roth accounts and municipal bond mutual funds.
Place health care high on your list of fixed expenses. Medicare plus supplemental insurance can cost a retired couple more than $700 a month. Even if you’re fortunate not to need much medical care, those premiums are a big monthly hit and they’ll grow each year. Prescription drugs can also be a large expense. What if you aren’t so fortunate? Remember that Medicare has no out-of-pocket limits.
Invest in ways that will provide a steady income stream in retirement. In many ways, retirement is no different from your working years: You want a steady flow of income. Do not be totally exposed to stock market fluctuations. You don’t want to worry about where that 4% withdrawal rate will come from each year.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Running on Empty, Taking Your Lumps and Pain Postponed. Follow Dick on Twitter @QuinnsComments.

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Life Interrupted

I HAVE SPENT my career writing about personal finance and investing—in other words, how to make the most of your money. But when I was downed by an accident that resulted in nearly five years in and out of hospitals, and the amputation of most of my left side, I was left a financially devastated invalid.

How could I have avoided this? What did I learn? I knew the rules. I had good health insurance and I had put away some money—but, of course, not enough. Could it ever be enough?

I want to pass on what happened and what I did right and wrong. It started when a street person attacked me when I was running with the family dog on a New York City street. He shoved me down. I shattered my left hip, had it patched up and continued on with my life.

Before long, we moved to the country and the patch became loose. The first—and worst—mistake I made was having it repaired locally, rather than returning to New York City, where I could get an expert surgeon to repair it. I had the hip replaced again and again—four times in all—before a serious infection set in. I lost three years of my life visiting orthopedic surgeons, infectious disease doctors and submitting to daily doses of intravenous antibiotics, before the doctors decided that the only way to get rid of the infection was amputation.

At that point, there were few choices left. I did seek the advice of a premier health care consulting firm, which confirmed the decision to amputate. The consultation was an important rung in the ladder. It has saved me from looking back and rethinking the decision. Two years ago, I had the amputation. I initially thought that we were talking about my left leg, but it turned out to be most of my left side.

My life had centered on my writing and on being an athlete. I ran the New York Marathon regularly, participated in 100-mile bike rides and enjoyed working in the garden, as well as hiking, skiing and regular visits to the gym to work out. Now, I can do none of that.

So that is a second thing I learned: Diversifying your financial portfolio is not enough. You must also diversify your personal portfolio, by which I mean physical pursuits and leisure activities. Once I became an invalid, there was little left for me to do—and, in any case, I was too weak to do much of anything.

Diversification is not exactly new advice. We hear it all the time. I did. But I ignored it. Or perhaps I was just too busy. So my advice is this: Follow the standard personal finance advice. Protect yourself, your heirs and your property with insurance. Set aside savings, including in and outside retirement accounts.

But also consider your personal portfolio. Cultivate leisure activities and learning experiences. And follow—and safeguard—your dreams.

Mary Rowland has been a journalist for more than three decades, writing for top publications like BusinessWeek, Fortune, The New York Times and USA Today. You can learn more at MaryRowland.com.

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Getting Carded

UNTIL OUR SON turned 15, most of our financial education efforts focused on having conversations about money, but in different buying contexts. How we decide on food purchases. How much we budget for clothes. Why we use credit cards. What a credit card bill looks like. The consumer research we do before making a major purchase.

We figured no one conversation would stick, but the knowledge and the ideas would create a general understanding over time. We also explained the importance of paying all our bills in full and on time, and consistently spending less than we earned. In addition, we said we lived by the motto that, “We never buy something on a credit card if we don’t already have the cash in the bank to pay for it.”

But when should we give our son an actual credit card?

Today, you need to be at least age 18 to get your own credit card. But because 18-year-olds need to prove they can make the necessary card payments, they often end up opening an account jointly with one of their parents.

What if your children are under 18? Instead of opening a joint account, you can add them as authorized users. Authorized users aren’t legally responsible for paying the credit card bills involved. Nonetheless, adding your children to one or more of your credit cards can help them build a credit history—though you should check with your credit card companies to make sure they do indeed pass along information on authorized users to the credit bureaus.

We did just that. When our son turned 15, we added him as an authorized user to some of our cards. Like that idea? Before you adopt this strategy, you need to understand credit histories and credit scores, and what this strategy could mean—both positive and negative—for your children.

Credit Karma offers details on different types of credit scores. Here are the five FICO score ranges and what they mean:

800-850 is Excellent
740-799 is Very Good
670-739 is Good
580-669 is Fair
300-579 is Poor

Meanwhile, if you want to know how your score compares with the rest of the country, the Motley Fool has a chart that shows the distribution of FICO credit scores. For example, 21% have a score between 800 and 850.

Before we did anything, we checked our credit scores to make sure they were reasonably high. Why? If you have an excellent credit score and you want to add a child as an authorized user, there isn’t a problem. Indeed, there’s not too much to worry about if your credit score is above 775. But if it’s any lower or likely to head lower, you’re potentially saddling your children with credit scars they don’t need. Remember, whatever you do with the credit cards that are attached to your children, that’ll become part of their credit history.

We were comfortable with our credit scores and our prospects for the future, so we signed up our son as an authorized user on three different cards. Discover and American Express have a minimum age of 15 for authorized users, while Chase has no age minimum.

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 fourth in a series of blogs about his and his wife’s experience educating their child about money. Previous blogs: Baby Steps, No Laughing Matter and Generating Interest.

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Non Prophet

THE SELF-PROCLAIMED fortune-teller Nostradamus published more than 6,000 predictions during his lifetime. With the benefit of hindsight, it’s easy to see that his prophecies had little substance or predictive value. In fact, in his day, even astrologers dismissed Nostradamus as incompetent.

But what if the person making a prediction is the opposite of Nostradamus? What if he is a serious individual, someone who is universally respected and whose forecasts have a demonstrated track record of success? Consider Robert Shiller, a Yale University economics professor and Nobel Prize winner, who has a reputation for making prescient calls. With his book Irrational Exuberance, he predicted the 2000 stock market crash. Later, he also foresaw the late-2000s housing market blowup. With that kind of track record, it seems worth paying attention to Shiller. 

What is he saying about today’s stock market? Pointing to a measure he developed, the cyclically adjusted price-earnings ratio or CAPE, Shiller makes two observations.

First, the market is more expensive today than at any other time since 1871—with one exception. That one exception? December 1999, just before the dot-com crash took the broad market down by almost 50%. Second, among major world markets, the U.S. stands alone. In April, Shiller proclaimed the U.S. “the most expensive market in the world.” Since then, it has only gone up more.

If Shiller were the only one making these kinds of statements, they might be easier to explain away. But unfortunately, Shiller is not alone. There’s also Joel Greenblatt, author of The Little Book That Beats the Market and an investor whose track record puts him nearly in a league of his own. When he ran a hedge fund, Greenblatt delivered returns of 50% per year in his first 10 years. To put that in perspective, he took each dollar invested and turned it into $38, an astonishing accomplishment.

What is Greenblatt saying about today’s market? He sees what Shiller sees: The market is expensive. In fact, looking back over the past three decades, he believes it has rarely been more expensive.

With these kinds of observations, how should you, as an investor, respond? These are the steps I recommend:

First, be careful not to misinterpret these observations. Both Shiller and Greenblatt are quick to point out that these are observations, not predictions. Neither sees himself as a Nostradamus. While Shiller is confident that the market will correct at some point, he acknowledges that it’s very difficult to know exactly when that day will come. Meanwhile, Greenblatt’s research indicates that the market may actually continue to rise from here, albeit at a slower pace than in the past.

Second, use asset allocation to protect your nest egg. Remember, you incur a permanent loss only when you choose to sell something at a low price. The simplest way to sidestep such losses is to avoid being forced to sell any of your investments when the market goes through one of its periodic downturns. How do you accomplish that? By keeping a sufficient number of years of spending money outside the stock market to carry you through a typical downturn.

Third, avoid trying to “time the market.” In other words, don’t look to profit by selling when the market is high and then attempting to buy back later when it’s lower. While that sounds appealing in theory, it turns out to be very difficult in practice. This was proven most recently by Aswath Damodaran, a New York University professor and authority on investment valuation. Using Shiller’s CAPE Ratio, Damodaran tested a variety of market timing strategies. His conclusion: “I couldn’t find a single way you could use CAPE to make money from timing the market.”

Adam M. Grossman’s previous blogs include Stress Test, All of the Above and Not My Thing . 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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August’s Newsletter

CAN MONEY management be reduced to a series of relatively simple rules that make sense for most Americans? For the past month or so, I’ve been inviting readers to test the Two-Minute Checkup, which I hope will one day be part of a larger website that helps folks figure out what to do with their money and then nudges them to act.

In HumbleDollar’s latest newsletter, I explain some of the logic that drives the Two-Minute Checkup’s recommendations. How much should you spend and how much can you reasonably borrow? What insurance do you need? What estate planning steps should you take? Are you in good financial shape? For most people, all of these questions can, I believe, be answered using a series of fairly simple rules.

August’s newsletter also looks at some recent changes at HumbleDollar, plus it includes our usual list of the seven most popular blogs from the past month.

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