Jonathan Clements's Blog, page 400

403 Beware

PUBLIC SCHOOL teachers’ biggest problem isn’t rowdy students. Instead, it’s their retirement plans that should be sent to the dean’s office.

After leaving my job as a foreign currency trader for an international bank, I became a middle school history teacher. My teaching career lasted more than 20 years. One of the worst things I encountered was the state of public school teachers’ non-ERISA 403(b) plans.

Having a front-row seat to the carnage was not pretty. My co-workers knew I had a financial background, so they often came to me with their statements. High-fee variable annuities and loaded mutual funds littered the crime scene.

After speaking with many teachers, more horror stories emerged. The financial salespeople who sold them this garbage also infected many of their other accounts. Whole life insurance policies and egregiously expensive, advisor-sold 529 plans were popular items on this unhealthy menu, along with non-traded real estate investment trusts in taxable accounts. I was aghast. Right then, I knew something had to be done.

Why are these 403(b) plans so horrible?

Non-ERISA plans offer employees very little protection. School districts are only responsible for administration—not the quality or cost of the investment options.
The vendor lists are dominated by large insurance and brokerage firms that sell expensive products. No one asks for an annuity in a retirement account. As the saying goes, annuities are sold, not bought.
School districts outsource their administrative duties to third party administrators (TPAs). These TPAs offer “free” services. In effect, this is a pay-to-play model that keeps low-cost providers off the “recommended lists.”
Most teachers lack basic financial literacy skills and, unlike 401(k) plans, the employer is under no obligation to educate them. Teachers often choose “advisors” based on what their (equally confused) colleagues are doing. Likability, instead of competency, becomes the main criteria for money management. “Nice guy” salesmen dominate the market.
Many companies hire former teachers to do their dirty work. This creates a false sense of trust. These ex-teachers aren’t there to help their colleagues. High commissions, in exchange for valuable contact lists, are the real terms of engagement.

According to Spectrem Group, 76% of teachers’ assets are invested in some form of annuity product. In other qualified plans, this would be grounds for massive class-action lawsuits.

How can we put an end to this exploitation? Here are five things my wife Dina and I are doing:

Publish articles, use social media and encourage respected financial journalists to educate the public.
Work with unions to get legislation passed that changes this conflict-ridden system in favor of transparency and education.
Lobby to get low-cost investments added to vendor lists.
Find teacher leaders to spread the movement organically.
Offer financial literacy programs for teachers and their students through webinars and school visits.

In the end, we believe history bends toward justice. This will be no different. Please help us by sharing this blog with any teachers you know. Every little bit counts when so much is at stake.

Tony Isola works at Ritholtz Wealth Management, specializing in helping educators reach their financial goals using a fiduciary model. To learn more, visit his blog,  A Teachable Moment, or follow him on Twitter @ATeachMoment.

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Bearing Gifts

AFTER A DECADE of rising stock prices, it’s time to look forward to the next bear market—and the three big benefits it’ll confer.

First, a market decline is a great financial gift, but only if you continue to save and invest. While it certainly won’t feel like a gift, a bear market enables you to invest at lower prices, both by adding new savings and reinvesting dividends.

Imagine you could choose from among three possible stock market scenarios. In scenario No. 1, the stock market climbs steadily in a straight line for 30 years. In scenario No. 2, you’re hit with periodic bear markets over the three decades. In scenario No. 3, stocks go nowhere for years, before powerfully rallying toward the end of the 30-year period. In all three scenarios, the market averages end up at the same level. The only difference is the path taken to get there.

Assuming you’re in the workforce the entire time, and saving and investing consistently, which stock market would you choose to live through? If you picked scenario No. 3, congratulations. That’s the best market scenario if you want the greatest wealth at the end of the 30 years, because it offers the chance to buy stocks at lower prices, on average. What if you chose No. 1? Sorry, that’s the worst one. Meanwhile, No. 2 is somewhere in between.

If you behave properly, by not selling and instead continuing to buy stocks, the more bear markets you have during your savings years, the greater the likelihood that you will ultimately retire with a larger nest egg. This may seem counter-intuitive. But remember, over very long time periods—think multiple decades—stock markets should mean revert. In other words, years of underperformance tend to be followed by years of outperformance—and those years of underperformance offer a great chance to buy shares cheaply.

Second, we only learn our true risk tolerance by living through bear markets. Fred Schwed wrote the celebrated 1940 book about Wall Street, Where Are the Customers’ Yachts? In it, he offers this memorable passage: “Like all of life’s rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. You cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin by words or pictures.”

There’s no way to know ahead of time how you will feel and, more important, how you will behave after losing a significant amount of money in the stock market. Asset allocation is the key determinant of your investment returns. Taking on more risk, by allocating more to stocks, should translate into higher returns over the long run.

But how much risk can you tolerate without losing sleep and bailing on stocks during a bear market? One of the most important things in investing is to understand yourself, because we are our own worst enemy. Living through a bear market is really the only way to discover the mix of stocks and bonds we’re comfortable living with.

In fact, I advocate that young adults start out with an 80% stock-20% bond mix, even though many “experts” would scoff at this and advocate a 100% stock allocation. A 100% stock allocation only maximizes your long-term returns if you don’t panic and go to cash the first time you experience a bear market.

Maybe you’ll experience a bear market with an 80-20 portfolio and barely break a sweat, continuing to rebalance as you’re supposed to. In that case, going forward, you might raise your stock allocation to 90% or more.

Third, bear markets put the kibosh on bull market foolishness. Not only do higher stock prices make investing riskier, but also the resulting euphoria sucks more people and more money into the market at the worst possible time.

Perhaps the one certainty in investing is the cyclical nature of markets and human psychology. This long into a bull market, it’s easy to forget that stock markets can suffer terrible and terrifying short-term losses. One of my favorite quotes is from Sir John Templeton: “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”

Optimism is contagious. You may believe that you think and act independently. But when things are going well in the economy and optimism is rampant, it’s hard to resist the herd mentality. That’s simply how we are wired. Recall the late 1990s dot-com bubble. Near the peak, how many people did you know who weren’t invested in tech stocks? Want a more current example of the increasing flow of money fueled by optimism? Look no further than this year’s IPO market.

A bear market will certainly dent your portfolio in the short run. But it might just save you even more in the long run—if it prevents you from falling prey to future market euphoria and the risky behavior that so often ensues.

Even if we don’t get caught up in the optimism around us, we aren’t immune to its effects. When market participants engage in increasingly risky behavior, it raises the riskiness of markets for everyone. Never forget the cautionary words of Warren Buffett: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”

John Lim is a radiologist in Reno, Nevada. His previous blog was Lay Down the Law. Follow John on Twitter @JohnTLim.

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Taking Inventory

MY NEXT DOOR neighbor had her home burglarized. The thieves stole some expensive electronic equipment and jewelry. In the aftermath, I thought I should make a list of my valuable possessions and take a photo of each one, in case I ever have to file an insurance claim.

Here’s my list of valuables:

1. Fender Telecaster guitar.

Yes, that’s my complete list. I really don’t own anything of value, other than that guitar, which my parents gave me in 1968 for my 17th birthday. I don’t own any expensive jewelry or electronic equipment. My television is about 10 years old. I own an iPhone 5 worth $25 on a trade-in for a new phone. My other possessions are of no real value.

I do own some watches and a ring that belonged to my father, which I keep in a safe deposit box. But their value is mostly sentimental. My list of valuable possessions also includes a small one-bedroom condominium and a 2010 Ford Fusion.

Looking at that list, you might think I live a spartan life, but I feel it’s full and comfortable. I don’t hesitate to spend on things I value. Whenever I can get away, I like to travel. I enjoy dinning out with friends. I subscribe to a Major League Baseball cable package that allows me to watch my favorite team. I have satellite radio in my car, so I can listen to my favorite music. I subscribe to HBO, Showtime, Cinemax and Amazon Prime to satisfy my desire for a good movie.

You know what I like about my list of valuables? It makes me feel safe and secure. I know that, in a financial emergency, I can lower my fixed expenses. I can always travel less, eat at home and drop my various subscriptions. My condominium and car are paid for. As a result, in a financial emergency, my fixed expenses would consist primarily of utilities, insurance, property taxes, food and homeowner’s association fees. I think of my low fixed expenses as a wall protecting me from financial disaster. Reducing expenses can be a first responder that saves you in a financial emergency.

If your list of valuables, however, includes a payment on a luxury car, diamond necklaces or a Rolex watch, life can get stressful during hard times. Even if your expensive valuables are paid for, you have to ask yourself, would I have been better off putting that money into my retirement savings plan or a six-month emergency fund? It might feel good driving that luxury car. It won’t feel so good when a financial emergency hits—and you don’t have the resources to deal with it.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include A Word of Advice, Lucky One and Friendly Reminder.

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Give and Receive

MANY OF MY CLIENTS volunteer to perform chores for religious institutions and other charitable organizations. I remind them that volunteers qualify for tax breaks. Their itemized deductions include what they spend to cover unreimbursed out-of-pocket outlays—though there are limits to the IRS’s generosity.

I caution clients not to count on deductions for the value of the unpaid time that they devote to charitable chores. Let’s say the prevailing rate for the kind of services they render is $100 per hour and they spend 100 hours to render those services during the year in question. That doesn’t entitle them to a $10,000 write-off. The IRS’s rationale: While deductions are allowed for gifts of property, the agency doesn’t consider their services to qualify as “property.”

The IRS also doesn’t allow volunteers to claim anything for the use of their homes or offices to conduct meetings. That, too, isn’t a contribution of “property.” Here are some other issues that often arise:

Blood donations. An IRS ruling says there’s no deduction for donating blood, except for any travel expenses to and from the blood bank. How does the IRS justify this restriction? Easy. Here, too, it says that the donors are performing “services” and not donating property. On the other hand, if you are paid for providing blood, the IRS insists on its share of any payment received.

Uniforms. Organizations like the Red Cross and the Scouts require their volunteers to wear uniforms. Because these uniforms aren’t adaptable to ordinary wear, the IRS says deductions are allowed for their cost and cleaning.

Overnight outlays. Many volunteers do work that requires them to be away from home overnight. Their deductions aren’t limited to travel expenses. They can also include lodgings and meals, as long as they’re “reasonable,” as opposed to “lavish or extravagant.” Also, these meals are 100% deductible, unlike business meals, which are only 50% deductible.

An example: While volunteer Imelda can deduct these expenses when she attends an organization’s convention as a duly appointed delegate, she can’t deduct personal expenses such as sightseeing or movie tickets, nor is Imelda allowed to deduct travel or other expenses incurred by her spouse or children.

What if she stays at a luxury hotel? The IRS could potentially challenge the cost as lavish and extravagant. Whether Imelda prevails might depend on the scope and importance of her charitable work.

A case in point: Harry T. Cavalaris, who sojourned at “deluxe” hotels when he did volunteer work for his church. A 1996 decision by the Tax Court rebuffed the IRS’s contention that the lodging expenses were lavish, stating that “while few would characterize his choices of accommodations as frugal, they were generally convenient.”

Harry testified that he used hotels that hosted the meetings he attended or similarly priced lodgings nearby when rooms were unavailable at host hotels, a practice that saved him additional travel costs. Moreover, he held prestigious positions at the charitable organizations, so staying at plush places might have been the reasonable thing to do.

The Tax Court did, however, draw a line: It disallowed extravagant tips, car repair expenses, spa charges and other expenditures not incurred for charitable reasons.

What if the IRS audits you? As a precaution, save a copy of the convention program and check off the sessions you attend as a delegate. Sign an attendance book for any sessions that provide one. Keep a diary of your convention-related expenses, along with hotel and restaurant bills.

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 Hitting Home, No Touching and Doctor’s Orders. Information about his books is available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

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Mini-Golf, Anyone?

I WAS RECENTLY on vacation. Okay, the truth is—since I’m retired—I’m always on vacation. Still, it was away-from-home time that costs extra money.

Back in the olden days, vacation meant our family of six squeezed into our 1972 two-door Duster and we were off on a six-hour drive to Cape Cod for one week. We saved for the entire year for that vacation. We allocated $100 a day to spend. If we spent less than $100, it meant more to spend another day. One of my children was the accountant, keeping the books on our daily allowance.

For many people today, vacation is quite different. A family of four staying four nights at Disney World can easily spend $6,000—if not more. I should know: I took my wife and my daughter’s family of five to Disney several years ago for four nights, and the tab was over $10,000.

Let’s look at the cost another way: A $6,000 trip doesn’t cost $6,000, but rather $34,461, or $28,461 more. How so? At 6% a year, that $28,641 is the lost interest on $6,000 over 30 years.

I know, lighten up, right?

In 2017, 150 million people worldwide visited Disney parks. I’m not picking on the good folks at Disney. There are many ways that Americans spend big bucks on vacations, like taking a family cruise or the whole gang to Mexico. Even renting a house at the beach runs into thousands. Have you seen what mini-golf costs these days?

Americans spent more than $100 billion on summer vacations in 2017, according to the Allianz Travel Insurance Vacation Confidence Index. “This spike in summer vacation spending represents a 12.5 percent increase over last year, also showing that Americans’ spending habits have increased for the second consecutive year,” says a travel industry news site.

Don’t get me wrong, I’m not a curmudgeon by trade. I enjoy a vacation and travel. But there is vacation spending and vacation spending. The irony may be that our quest for family time—and for relaxation—ends up causing stress when those credit-card bills come due. Is the giant turkey leg you’re chomping on, while waiting in line for that next Disney attraction, really worth paying 20% interest?

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Under Construction, Get Me the Doctor and Running in Place. Follow Dick on Twitter @QuinnsComments.

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Double Feature

THE INTERNATIONAL edition of my 2016 book, How to Think About Money, was published today by Harriman House in the U.K. Another book, you ask? Yes, this is indeed my second book launch in as many months. In September, John Wiley & Sons published my eighth personal finance book, From Here to Financial Happiness.

For the new edition of How to Think About Money, I updated a host of numbers, added some recent research findings and tweaked the various chapters, so they’re less focused on the U.S. and more relevant to a global audience. You can see the contents page and initial chapters by clicking here.

My agreement with the folks at Harriman allows them to sell the new edition everywhere, except the U.S. and Canada. Still, I figure some HumbleDollar readers might want a copy of the book, not least because of the super-cool cover. You can purchase the international edition of How to Think About Money directly from Harriman for £12.99, equal to a little under $17.

Problem is, if you’re outside the U.K., Harriman will likely charge you £4.50 for international shipping. To offset that cost, I asked Harriman for a special discount for HumbleDollar readers. If you buy from the Harriman website, you can use this promo code during checkout: H2TAMoffer. That’ll save you £4.50. The promo code is good through Nov. 5.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His other new book, From Here to Financial Happiness, can now be ordered from Amazon and Barnes & Noble. 

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When to Roth

MY 10-YEAR-OLD son and I had a chance encounter last month with the commissioner of the Boston Police Department. After saying hello, he bent down and offered my son this advice: “Stay in school,” he said, “and listen to your parents.”

Often, the recipe for childhood success is just that simple. Ditto when it comes to managing money. The basic principles are usually pretty straightforward. But there’s one topic that often leaves people with a headache. That’s the question of whether, or when, to do a Roth conversion. At the risk of giving you a headache, that’s the issue I’m tackling today.

If you’re not familiar with it, here’s the idea behind a Roth conversion: Individuals can choose, at any time and at any income level, to move money out of a traditional IRA and into a Roth IRA, where the money will grow tax-free thereafter. There’s a catch, however. In the year that you do a conversion, you must pay income tax on the taxable amount you convert. The bet you’re making is that your tax rate today will be lower than it will be later on, when you otherwise would start taking money out of your IRA.

That involves several unknowns. Not only do you have to estimate your future income, but you also need to guess whether Congress might change the tax code again. And if you think your children might ultimately inherit your IRA, you’ll need to factor in their tax situation. Worse yet, as of this year, Congress took away taxpayers’ ability to “recharacterize”—or undo—a conversion, so you really want to be confident you’re making the right choice before you go ahead.

Absent a crystal ball, there’s no foolproof way to make the decision. But these are the steps I would recommend:

Step 1: Determine your current marginal tax rate. The term “marginal” refers to the tax rate on the last dollar that you earn. Typically, this isn’t difficult. But because new rules went into effect in January of this year, you might ask your accountant for help, if you have one.

Step 2: Try to estimate, however roughly, what your income will look like in retirement. Conventional wisdom says that your income, and therefore your tax rate, will always be lower in retirement than while you’re working. But you’ll want to test this assumption rigorously. The following formula is a starting point for estimating your taxable income in retirement:

Social Security income
Plus: Required minimum distributions from your IRAs
Minus: Qualified charitable distributions from your IRAs
Plus: 3% of the value of your taxable investments (allowing for dividends and interest)
Plus: Pension or annuity income
Plus: Income from part-time work, rental properties or other passive income
Minus: Standard deduction
Equals: Estimated taxable income in retirement

Now, compare your current tax rate to the rate that would apply in retirement. If you’re confident that your future tax rate will be demonstrably higher than it is today, consider doing a conversion now. Otherwise, I would wait.

Step 3: If you’re currently in the highest bracket, or if a Roth conversion would put you in the highest bracket, then you probably won’t want to do a conversion. There are, however, two exceptions to consider.

Exception No. 1: If you believe Congress will raise rates in the future, it’s possible that your tax rate could be even higher down the road. It may seem hard to imagine, but as recently as 1981 the top tax bracket was 70%. I wouldn’t base a decision on this kind of speculation. But some people feel strongly that our fiscal situation will require higher tax rates, so it’s something to consider.

Exception No. 2: If your assets are likely to make you subject to the federal estate tax—meaning you have more than $11 million and you’re single or over $22 million and you’re married—it might make sense to do a Roth conversion during your lifetime, even if you’re in the highest tax bracket. That’s because the income taxes you would pay to do the conversion would reduce the size of your estate, and hence your estate’s tax bill, thus increasing your estate’s after-tax value for your children.

Step 4: Be sure you can afford it. Unless you are older than age 59½ when you do a Roth conversion, you’ll need additional funds to pay the associated tax—because you can’t dip into your IRA to pay the taxman without triggering tax penalties.

Step 5: If the calculations you do in steps 2 and 3 don’t favor a Roth conversion today, that doesn’t mean it will never make sense. For planning purposes, it’s worth forecasting when the math might work out. For most people, there’s a brief window, just after you stop working but before age 70, when your income may be low enough to accommodate a conversion.

To evaluate this, I suggest using the above formula to estimate your tax rate during those early retirement years. If you foresee a period of low-tax years, you may want to mark your calendar and plan for a series of conversions during those years. Keep in mind that, if you do a Roth conversion in your 60s, you may not only increase the income taxes on your Social Security benefit, but it could also boost the Medicare premiums you pay.

As you can see, the Roth conversion question isn’t easy. For that reason, my overall recommendation is this: After working through these steps, I wouldn’t do a conversion unless the numbers clearly and conclusively favor it. If the math is at all inconclusive, I would wait and revisit the question each year in the future.

Adam M. Grossman’s previous blogs include Not for You, Off Target and Just Like Warren . 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. 33

FORGET THE GOOD LIFE. Today, what many folks want is something quite different: A Good Life. Tired of running the hedonic treadmill and getting nowhere fast? Stop seeking happiness in the next promotion, pay raise and purchase—and instead try the half-a-dozen simple strategies suggested in HumbleDollar’s latest newsletter.

Behind on your reading? Our latest newsletter also includes brief descriptions and links to the 17 blogs we’ve published since our mid-September newsletter.

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A Good Life

IS THIS A MOMENT of cultural change? I see glimpses of a new way of thinking. The New York Times recently ran articles on both the cult of thrift and the financial independence/retire early—or FIRE—movement. Words like mindfulness, purpose and meaning have gained new currency. U.S. household debt is growing, but it’s still barely higher than a decade ago. The national savings rate even shows signs of improving.

Maybe this is yet another reverberation from the Great Recession. Maybe it’s financial necessity, as Americans adjust their lifestyle to their skimpy savings. Maybe our perspective on money is changing: The young are turned off by the work world’s brutally long hours and constant layoffs, while the old are realizing how little happiness money has brought them.

Gone is the obsession with The Good Life. We were raised to think that happiness lay in material goods and moments of relaxation. But the material goods proved disappointing and those moments of relaxation left us restless. Now, what people increasingly want is A Good Life—one that’s focused on time with friends and family, work that’s fulfilling and a sense of financial security.

I’m not suggesting everybody’s on board with this cultural shift. There are still plenty of folks who seek salvation at the shopping mall or one rung further up the corporate ladder. We’re hardwired to run the hedonic treadmill, confident that the next purchase, promotion or pay raise will finally bring lasting happiness, only to discover it doesn’t.

But it’s also possible to buck those hardwired instincts, cultivate new habits and learn new ways of thinking. Change isn’t easy, but it is indeed possible.

Think about the investment world. Most of us are inclined to be overconfident. One example: 65% of Americans think they’re more intelligent than average. In the past, that sort of overconfidence led many investors to try their hand at beating the market. But over the past decade, millions have realized that this overconfidence has cost them dearly, prompting them to shovel trillions of dollars into market-matching index funds.

Similarly, it’s possible to unlearn the beliefs that have left us going nowhere fast on the hedonic treadmill. As I’ve written elsewhere, I see this among my peers, those also in their 50s and 60s. After decades of disappointment, they’ve grown wiser about how to deploy their money for maximum happiness.

Ready to ditch The Good Life and pursue A Good Life instead? Here are half-a-dozen simple strategies, all drawn from my new book:

Create a wish list of potential expenditures, stick it on the refrigerator and revise it constantly. That’ll prompt you to think harder about how you spend your money—and you’re more likely to use your dollars in ways that bring greater happiness.
Think about which moments you enjoy the most during a typical week and which you dislike the most. See if you can pay others to do the tasks you loathe and use the freed-up time to focus on activities you truly enjoy.
Figure out what causes you financial anxiety and then revamp your finances to ease those worries. Often, you can achieve substantial peace of mind simply by keeping a few thousand in the bank, ridding yourself of nonmortgage debt and saving regularly for the future.
Make plans with friends and family—and, if you can, make them far ahead of time. Research says spending time with friends and family gives a huge boost to happiness. And if you hatch those plans far in advance, whether it’s making a restaurant reservation, buying concert tickets or booking a vacation, you’ll enjoy a long period of eager anticipation, which may prove more enjoyable than the event itself.
Imagine the size of your paycheck didn’t matter. What sort of work would you do? You could indeed do that sort of work as a second career—if you prep your finances by saving diligently in the years ahead.
On this earth, our only immortality is the memory of others. Think about how you would like to be remembered by friends and family. What would it take to create those memories—and are you taking the necessary steps?

Aw Shucks

“If you’re interested in improving your financial health or helping someone else repair theirs, run—don’t walk—to get this book.”—Tony Isola, A Teachable Moment

“It’s the first personal finance book I’ve read in quite a while that had me frequently taking notes for my own benefit.”—Mike Piper, ObliviousInvestor.com

“Jonathan Clements says you can build a happier, more prosperous financial life just by spending five or 10 minutes a day for 77 days. Dubious? I confess I was until I read his new book. Now, I’m a convert.”—Richard Eisenberg, NextAvenue.org

Latest Blogs

Influenced by academic research, many investors lean toward small and value stocks. Adam Grossman asks, is it time to add a quality tilt?
“Why do earnings drive share prices?” asks a perplexed Richard Quinn. “Because they create more value. Value for who? Shareholders. But how? Because they increase share prices. How much does this merry-go-round ride cost?”
Looking to improve your finances? Phil Dawson read Jordan Peterson’s bestselling book—not once, but twice—and came away with a dozen financial lessons.
“If you’re looking for a large reward for relatively little effort, I would argue that few endeavors can rival learning about finance,” writes John Lim.
The official savings rate has been revamped—and it now looks like we’ve had a return to financial rectitude since the Great Recession. But is this happy story believable?
“I longed to fall asleep to the sound of chirping crickets, rather than the noise of footsteps pacing back and forth above me,” writes Kristine Hayes. “And so, a few months ago, I began to contemplate becoming a homeowner again.”
Eyeing a target-date fund? “Choosing an investment based on your age is like choosing clothing based on your age,” writes Adam Grossman. “It might be okay when you’re a toddler, but it makes little sense as you get older.”
What would it take to put Social Security on a solid financial footing? Richard Quinn runs the numbers.
Owning a home is now more taxing: The new law severely crimps deductions for mortgage interest, state and local taxes, and casualty losses, explains Julian Block.
“I’m not sure hiring a financial advisor is a sign of getting old, but that’s the way it struck me,” writes Dennis Friedman. “I believe there could be a time when I can no longer manage my investment portfolio.”
The problem isn’t finding great hedge funds and venture capital funds, says Adam Grossman. Rather, the problem is that—as an individual—you simply can’t get in.
“I got a text from my loan officer,” recalls Kristine Hayes. “I nearly choked when I read the message. She told me I’d qualified for a $403,000 loan, with as little as a 5% down payment.”
Creating a written budget, and then tracking your spending against it, is considered a sign of high financial rectitude. Here’s why you shouldn’t bother.
“Many people see health insurance as the problem,” writes Richard Quinn. “It isn’t. Our problem is how we use health care. That’s what drives premiums and that’s what we must deal with.”
How did Dennis Quillen recover from his gray divorce? He dumped his actively managed funds, cut his trading costs—and saved half his income.
“We’re on dangerous ground and yet the [stock] market goes blithely on,” says Vanguard founder Jack Bogle. “You better save more money. You better get more costs out of the equation. It’s probably wise to sell to the sleeping point.”
What caught readers’ attention in September? Check out the seven most popular blogs published by HumbleDollar last month.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness, can now be ordered from Amazon and Barnes & Noble. Jonathan’s most recent articles include Jack of Hearts, Budget Busting and All Better.

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Jack of Hearts

ON WEDNESDAY, Vanguard Group’s 89-year-old founder John C. Bogle was in hospital to receive treatment for his latest health scare—an irregular rhythm in his transplanted heart. On Thursday and again today, he was at the Bogleheads’ 17th conference in Philadelphia, as feisty as ever.

The Bogleheads are, of course, the online community who congregate at Bogleheads.org. They’re renowned as fans of frugality—especially frugally priced index funds. And Jack Bogle—even though it’s been more than two decades since he was Vanguard’s Chief Executive Officer—remains their guiding light. He has a new book, Stay the Course, which should be out next month.

Near the beginning of his remarks on Thursday, he quoted the Ancient Greek playwright Sophocles: “One must wait until the evening to see how splendid the day has been.” He then added, “I think my evening is here, and I don’t much like that.”

Jack’s long day has included launching the first index mutual fund in 1976. He was talking about evidence-based investing decades before it was a thing—and even now he’s quick to back his remarks with a timely statistic. Here are just some of his comments from this week’s conference:

1. He points out that today traditional index mutual funds and exchange-traded index funds together account for 37.8% of stock and bond fund assets, up from 9.1% in 2000 and 21.2% in 2010. ETFs now hold slightly more assets than traditional index mutual funds.

Jack’s not entirely happy about that—he notes that investors are too quick to buy and sell ETFs—but admits to mellowing somewhat. “I don’t want to be too tough on ETFs, because there are good uses for them,” he allows.

2. Why buy index funds? Again, Jack goes to the numbers. If you look across the nine U.S. stock market style boxes—large-cap growth, small-cap value, mid-cap blended style funds and so on—just 7% of actively managed funds have outperformed their benchmark index over the past 15 years, according to data from S&P Global.

Advocates of active management often contend that stock pickers are more likely to shine in less efficient markets, such as those for smaller-company stocks. But Jack notes that, over the past 15 years, actively managed large-cap funds have trailed their benchmark index by an average 1.54 percentage points, mid-cap funds by 2.01 and small-cap funds by 2.24. He attributes small-cap funds’ larger shortfall to their higher trading costs and higher annual expenses.

3. Many investors—including me—tilt their portfolios toward value stocks. But Jack points out that, while value has indeed outpaced growth stocks over the past 90 years, the performance advantage has disappeared in recent decades.

“If you think something will be better forever, it’s highly unlikely it will be better forever,” he quips. One piece of evidence cited by Jack: Since Vanguard launched its first value and growth index funds in 1992, the average annual returns have been almost identical.

4. Since year-end 2014, Vanguard has captured 80% of the net new cash flowing into funds. It now manages almost a quarter of stock and bond fund assets, more than twice as much as Fidelity Investments, the next largest fund manager.

In response, Fidelity has rolled out four index funds with zero annual expenses. “They’re clearly making an effort to make a big show in the indexing business,” Jack says. “It’s what I would do if I were Fidelity. I think it’s going to draw a lot of business.”

He says that, for Vanguard, there isn’t a good competitive response. It doesn’t overcharge on some funds in order to subsidize others—which is what Fidelity and other fund companies are clearly doing. “We’re in a kind of a box,” he concedes.

Still, he notes that investors with funds in taxable accounts would be crazy to sell their current funds to buy Fidelity’s new zero-cost index funds. The resulting capital-gains tax bill would likely swamp the potential cost savings.

5. Over the next 10 years, Jack sees nominal corporate profits growing at an average 4% a year, while investors also collect 2% in dividends, giving them a potential total return of 6% a year. But he says, “It would probably take a 25% drop [for the stock market] to get to its normalized value.”

He sees investors surrendering two percentages points a year to falling price-earnings ratios over the next decade, leaving them with a nominal annual return of 4%—which shrinks to just 2%, once you factor in inflation. Meanwhile, over the next 10 years, he expects bond investors to earn a nominal 3½% a year, or 1½% after inflation.

“Everything that’s happening today is great for the short term and terrible for the long term,” Jack cautions. “We’re on dangerous ground and yet the [stock] market goes blithely on.”

Faced with low expected returns, what’s his advice? “You better save more money,” Jack counsels. “You better get more costs out of the equation.”

What about lightening up on stocks? “It all depends on your financial ability and emotional ability to withstand a market decline,” he says. “It’s probably wise to sell to the sleeping point.”

Jack suggests “you might do a five or 10 percentage point reduction” in your stock exposure. But he adds: “There’s no certainty in this, so you never want to do anything too big.”

What did Jack Bogle say at last year’s Bogleheads’ conference? Check out our summary of 2017’s meeting.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness , can now be ordered from  Amazon  and Barnes & Noble . Jonathan’s most recent articles include Budget Busting ,  All Better , Archie Is Scum and  My Favorite Questions .

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