Jonathan Clements's Blog, page 433

Time Will Tell

IF WE COULD VIEW TODAY from 10 years hence, our behavior—financial and otherwise—would be entirely different. We wouldn’t flail around so much in the muck of everyday life, fretting and fighting about nonsense. Instead, we’d focus more on issues that matter to our long-term wellbeing.

Problem is, it seems this sense of perspective can’t be taught by schools and colleges. Instead, it’s learned only through experience. It would be wonderful if we could be wise at age 20, but wisdom often eludes us until much later in life, at which point we’ve had decades of unnecessary turmoil and missed opportunities. Here are just five of the things that time teaches us:

1. Today, we worry that stocks are a bad investment. Thirty years from now, we’ll wonder why we owned anything else.

2. The market may appear easy to beat, and we may indeed outperform the averages over the next 12 months. But we won’t beat the market over a lifetime of investing, and the harder we try, the worse our results are likely to be.

3. Ten years from now, nobody’ll care or even remember that we didn’t get the promotion. And that likely includes us.

4. That purchase we desperately want? It isn’t going to transform our life. In fact, a year after we hand over our hard-earned dollars, we will likely barely notice our latest purchase—and we might even regret it.

5. Our life may be important to us and to those around us. But let’s keep things in perspective: There are seven billion of us, so any sense of self-importance is a tad ridiculous. We should strive to squelch our inner self-absorbed teenager sooner rather than later—and approach the world with a shrunken sense of entitlement and a greater appreciation of others.

Time Will Tell

IF WE COULD VIEW TODAY from 10 years hence, our behavior—financial and otherwise—would be entirely different. We wouldn’t flail around so much in the muck of everyday life, fretting and fighting about nonsense. Instead, we’d focus more on issues that matter to our long-term wellbeing.

Problem is, it seems this sense of perspective can’t be taught by schools and colleges. Instead, it’s learned only through experience. It would be wonderful if we could be wise at age 20, but wisdom often eludes us until much later in life, at which point we’ve had decades of unnecessary turmoil and missed opportunities. Here are just five of the things that time teaches us:

1. Today, we worry that stocks are a bad investment. Thirty years from now, we’ll wonder why we owned anything else.

2. The market may appear easy to beat, and we may indeed outperform the averages over the next 12 months. But we won’t beat the market over a lifetime of investing, and the harder we try, the worse our results are likely to be.

3. Ten years from now, nobody’ll care or even remember that we didn’t get the promotion. And that likely includes us.

4. That purchase we desperately want? It isn’t going to transform our life. In fact, a year after we hand over our hard-earned dollars, we will likely barely notice our latest purchase—and we might even regret it.

5. Our life may be important to us and to those around us. But let’s keep things in perspective: There are seven billion of us, so any sense of self-importance is a tad ridiculous. We should strive to squelch our inner self-absorbed teenager sooner rather than later—and approach the world with a shrunken sense of entitlement and a greater appreciation of others.

The post Time Will Tell appeared first on HumbleDollar.

Sitting in the Bleachers

I RARELY MAKE significant changes to my portfolio, but I still love to watch the financial markets. They’re great theater—and, if you can resist the urge to trade, free entertainment. Here are five random observations from the cheap seats:

First, don’t let your political views guide your investment strategy. The stock market has rallied modestly since Trump’s election, horrifying Clinton supporters who fear for the country’s future. But remember, any time you swap stocks for bonds, you’re making a bad long-term bet, because you’re exchanging a high-return asset for one with a lower expected return.

Second, stocks have been lackluster performers for the past 19 months. Even with the post-election rally, the S&P 500 is just 6.6% above its May 2015 high. One reason for that sluggish performance: Reported earnings per share for the S&P 500 companies peaked in 2014—and they remain 16% below that level.

Third, the so-called Smart Money keeps bashing everyday investors who favor dividend-paying stocks—and dividend investors keep getting richer. The Smart Money’s argument: All securities should be priced to deliver the same risk-adjusted return, so what folks make in dividends they should sacrifice in price appreciation. But if that’s the case, where’s the harm in favoring dividends? If you buy the Smart Money’s argument, it should be a wash.

And there’s a chance it won’t be a wash—and dividend investors will come out ahead. Dividend-paying stocks are often value stocks, and may benefit from the historical tendency for value stocks to outperform growth stocks. In addition, dividend-paying companies may be better run, because paying that regular dividend forces management to be more careful in handling the corporation’s cash.

Fourth, the Smart Money also likes to bash yield chasers who buy preferred stock, junk bonds and other riskier “fixed income” investments. I have more sympathy with this criticism, because I fear investors don’t realize that the high income may come at the expense of capital losses.

That said, ponder this: Many observers—including me—expect muted stock returns over the next decade, perhaps 6% a year. If you buy an emerging market debt fund or a high-yield junk bond fund that yields 6%, you might notch returns that aren’t that much worse than the stock market, even if you suffer some capital losses. My hunch: Emerging market debt could benefit as developing countries see their credit standing upgraded, while junk bonds are a dodgier proposition.

Finally, gold has been on a wild ride this year. It started 2016 at $1,060, got as high as $1,387 and is now back to $1,134 The ride has been even wilder for investors in gold stock funds, which are effectively a leveraged bet on gold. For instance, Vanguard’s gold fund—one of the category’s tamer offerings—had doubled in value as of August, but now sports a year-to-date gain of 41%. Were you enthusiastic about gold in August? You should be even more enthusiastic now.

The post Sitting in the Bleachers appeared first on HumbleDollar.

Sitting in the Bleachers

I RARELY MAKE significant changes to my portfolio, but I still love to watch the financial markets. They’re great theater—and, if you can resist the urge to trade, free entertainment. Here are five random observations from the cheap seats:

First, don’t let your political views guide your investment strategy. The stock market has rallied modestly since Trump’s election, horrifying Clinton supporters who fear for the country’s future. But remember, any time you swap stocks for bonds, you’re making a bad long-term bet, because you’re exchanging a high-return asset for one with a lower expected return.

Second, stocks have been lackluster performers for the past 19 months. Even with the post-election rally, the S&P 500 is just 6.6% above its May 2015 high. One reason for that sluggish performance: Reported earnings per share for the S&P 500 companies peaked in 2014—and they remain 16% below that level.

Third, the so-called Smart Money keeps bashing everyday investors who favor dividend-paying stocks—and dividend investors keep getting richer. The Smart Money’s argument: All securities should be priced to deliver the same risk-adjusted return, so what folks make in dividends they should sacrifice in price appreciation. But if that’s the case, where’s the harm in favoring dividends? If you buy the Smart Money’s argument, it should be a wash.

And there’s a chance it won’t be a wash—and dividend investors will come out ahead. Dividend-paying stocks are often value stocks, and may benefit from the historical tendency for value stocks to outperform growth stocks. In addition, dividend-paying companies may be better run, because paying that regular dividend forces management to be more careful in handling the corporation’s cash.

Fourth, the Smart Money also likes to bash yield chasers who buy preferred stock, junk bonds and other riskier “fixed income” investments. I have more sympathy with this criticism, because I fear investors don’t realize that the high income may come at the expense of capital losses.

That said, ponder this: Many observers—including me—expect muted stock returns over the next decade, perhaps 6% a year. If you buy an emerging market debt fund or a high-yield junk bond fund that yields 6%, you might notch returns that aren’t that much worse than the stock market, even if you suffer some capital losses. My hunch: Emerging market debt could benefit as developing countries see their credit standing upgraded, while junk bonds are a dodgier proposition.

Finally, gold has been on a wild ride this year. It started 2016 at $1,060, got as high as $1,387 and is now back to $1,134 The ride has been even wilder for investors in gold stock funds, which are effectively a leveraged bet on gold. For instance, Vanguard’s gold fund—one of the category’s tamer offerings—had doubled in value as of August, but now sports a year-to-date gain of 41%. Were you enthusiastic about gold in August? You should be even more enthusiastic now.

Worldly Possessions

HOW MUCH ARE WE ALL WORTH? The Credit Suisse Research Institute recently published its 2016 Global Wealth Report, as well as the accompanying Global Wealth Databook. It’s a tricky undertaking, given the difficulty of getting accurate data, even for developed countries. Still, the results are intriguing:

U.S. families own 33.2% of the world’s $256 trillion net worth. This figure combines financial assets (think stocks and bonds) and real assets (principally housing), with household debts then subtracted.
U.S. net worth averages $345,000 per adult, while the median net worth is $45,000. (The $345,000 average represents total U.S. net worth divided by all U.S. adults—and is skewed upward by the super-wealthy—while the $45,000 median represents the net worth of adults halfway down the wealth spectrum.) Worldwide, average net worth is $53,000 and median net worth is $2,200.
Global gross wealth is split between 54.5% financial assets and 45.5% real assets, while debts are equal to 14.1% of gross wealth. In the U.S., financial assets make up a much larger portion of gross wealth—between 64% and 72%, depending on the methodology used.
The U.S. is home to an impressive 41.2% of the world’s millionaires. Less impressive: 34.6% of U.S. adults have a net worth below $10,000, an alarming number, though better than the global figure of 73.2%.
Among adults in North America, 9% have a negative net worth—a level similar to other regions of the world, including Asia Pacific, Latin America, Europe and Africa. Still, a negative net worth in a developed country like the U.S. doesn’t necessarily mean great day-to-day hardship, because the debt may reflect student loans owed by young adults and because incomes are so much higher than in other parts of the world.

Related: Where We Stand: America’s Personal Finances

The post Worldly Possessions appeared first on HumbleDollar.

Worldly Possessions

HOW MUCH ARE WE ALL WORTH? The Credit Suisse Research Institute recently published its 2016 Global Wealth Report, as well as the accompanying Global Wealth Databook. It’s a tricky undertaking, given the difficulty of getting accurate data, even for developed countries. Still, the results are intriguing:

U.S. families own 33.2% of the world’s $256 trillion net worth. This figure combines financial assets (think stocks and bonds) and real assets (principally housing), with household debts then subtracted.U.S. net worth averages $345,000 per adult, while the median net worth is $45,000. (The $345,000 average represents total U.S. net worth divided by all U.S. adults—and is skewed upward by the super-wealthy—while the $45,000 median represents the net worth of adults halfway down the wealth spectrum.) Worldwide, average net worth is $53,000 and median net worth is $2,200.Global gross wealth is split between 54.5% financial assets and 45.5% real assets, while debts are equal to 14.1% of gross wealth. In the U.S., financial assets make up a much larger portion of gross wealth—between 64% and 72%, depending on the methodology used.The U.S. is home to an impressive 41.2% of the world’s millionaires. Less impressive: 34.6% of U.S. adults have a net worth below $10,000, an alarming number, though better than the global figure of 73.2%.Among adults in North America, 9% have a negative net worth—a level similar to other regions of the world, including Asia Pacific, Latin America, Europe and Africa. Still, a negative net worth in a developed country like the U.S. doesn’t necessarily mean great day-to-day hardship, because the debt may reflect student loans owed by young adults and because incomes are so much higher than in other parts of the world.

A Really Useful Engine

MY DAYS ARE CONSUMED with a hodgepodge of activities—writing books, speeches, radio interviews, my bimonthly newsletter, blogging and more. What ties all these activities together? More than anything, I want to be part of the conversation.

When I first entered the work world more than three decades ago, I imagined that—once my finances allowed—I would happily retire to a rural area and retreat from worldly hassles. But now that I can afford to retire, I’ve come to realize it’s the last thing I want: The quiet. unproductive life would likely keep me happy for 72 hours before boredom and restlessness set in.

What’s the alternative? As we age, the satisfaction from external rewards—the promotions, pay raises, bigger homes, faster cars—tends to fade. We care less about what our bosses and our neighbors think. Instead, we become more motivated by work that we think is important and that we’re passionate about. These activities can be the cornerstone of a midlife career change and a more fulfilling retirement.

Being “intrinsically motivated” is often viewed as far more admirable than being motivated by external rewards: We’re undertaking tasks not because somebody is dangling carrots or threatening us with sticks, but because we think they’re truly worthwhile.

Yet internal and external motivation can’t be separated quite so cleanly. Very few of us would happily spend our days creating art that others would never see, doing good deeds that others would never know about, writing books that others would never read or cultivating gardens that others would never enjoy. We want to do good work—but we also want the validation of others.

There’s no shame in that. Like Thomas the Tank Engine, it’s okay to want to be a “really useful engine.” But it’s also a slippery slope. If our goal becomes not usefulness, but fame or even immortality, we can hardly claim to be intrinsically motivated—and our desire for applause is arguably no worthier than that of the corporate climber who hungers for the next promotion.

As I like to remind people, there have been 43 U.S. presidents (but 44 presidencies, if you count Grover Cleveland twice). No doubt all thought they had achieved some measure of immortality. But today, you would be hard pressed to find many folks who can name all 43 presidents, let alone tell you much about each. If immortality is proving elusive for U.S. presidents, there isn’t much hope for the rest of us.

The bottom line: There’s some satisfaction to be found in the adulation of others. But it’s fleeting at best. Instead, sustained happiness lies in doing meaningful work day after day, week after week, no matter how loud the applause is.

The post A Really Useful Engine appeared first on HumbleDollar.

A Really Useful Engine

MY DAYS ARE CONSUMED with a hodgepodge of activities—writing books, speeches, radio interviews, my bimonthly newsletter, blogging and more. What ties all these activities together? More than anything, I want to be part of the conversation.

When I first entered the work world more than three decades ago, I imagined that—once my finances allowed—I would happily retire to a rural area and retreat from worldly hassles. But now that I can afford to retire, I’ve come to realize it’s the last thing I want: The quiet. unproductive life would likely keep me happy for 72 hours before boredom and restlessness set in.

What’s the alternative? As we age, the satisfaction from external rewards—the promotions, pay raises, bigger homes, faster cars—tends to fade. We care less about what our bosses and our neighbors think. Instead, we become more motivated by work that we think is important and that we’re passionate about. These activities can be the cornerstone of a midlife career change and a more fulfilling retirement.

Being “intrinsically motivated” is often viewed as far more admirable than being motivated by external rewards: We’re undertaking tasks not because somebody is dangling carrots or threatening us with sticks, but because we think they’re truly worthwhile.

Yet internal and external motivation can’t be separated quite so cleanly. Very few of us would happily spend our days creating art that others would never see, doing good deeds that others would never know about, writing books that others would never read or cultivating gardens that others would never enjoy. We want to do good work—but we also want the validation of others.

There’s no shame in that. Like Thomas the Tank Engine, it’s okay to want to be a “really useful engine.” But it’s also a slippery slope. If our goal becomes not usefulness, but fame or even immortality, we can hardly claim to be intrinsically motivated—and our desire for applause is arguably no worthier than that of the corporate climber who hungers for the next promotion.

As I like to remind people, there have been 43 U.S. presidents (but 44 presidencies, if you count Grover Cleveland twice). No doubt all thought they had achieved some measure of immortality. But today, you would be hard pressed to find many folks who can name all 43 presidents, let alone tell you much about each. If immortality is proving elusive for U.S. presidents, there isn’t much hope for the rest of us.

The bottom line: There’s some satisfaction to be found in the adulation of others. But it’s fleeting at best. Instead, sustained happiness lies in doing meaningful work day after day, week after week, no matter how loud the applause is.

Your Risk-Free Rate

WHEN DECIDING WHETHER it’s worth taking an investment risk, your starting point should be the so-called risk-free rate. That’s the return you can earn by taking little or no risk. Got your eye on an investment that might perform better? You need to decide whether the potential extra return, relative to the risk-free rate, is worth the added danger involved.

When experts talk about the risk-free rate, they usually point to some sort of Treasury security. Lately, that’s been an easy bogey to beat, thanks to the Federal Reserve’s loose monetary policy. For instance, if you have a short investment time horizon, you might compare possible investments to three-month Treasury bills, which today yield a tiny 0.5%. Longer-term investors might look to 10-year Treasury notes, which currently yield almost 2.5%, or even to 10-year inflation-indexed Treasurys, which are paying 0.6% above inflation.

But arguably, for anyone with loans outstanding, the risk-free rate shouldn’t be a Treasury security, but rather the interest rate on their highest-cost debt—and that can be a much tougher benchmark to beat. Let’s say you’re carrying a credit-card balance costing 20% a year. Paying off that balance is likely a smarter bet than any investment, except perhaps funding a 401(k) plan with a matching employer contribution.

Even tax-deductible mortgage debt can prove to be a high hurdle. Suppose you’re in the 25% tax bracket and your mortgage is costing you 4%, so your after-tax cost is 3%. You should be able to outpace that 3% over the long haul by buying stocks. But if you’re inclined to purchase bonds or certificates of deposit, you would probably be better off paying down your mortgage.

The post Your Risk-Free Rate appeared first on HumbleDollar.

Your Risk-Free Rate

WHEN DECIDING WHETHER it’s worth taking an investment risk, your starting point should be the so-called risk-free rate. That’s the return you can earn by taking little or no risk. Got your eye on an investment that might perform better? You need to decide whether the potential extra return, relative to the risk-free rate, is worth the added danger involved.

When experts talk about the risk-free rate, they usually point to some sort of Treasury security. Lately, that’s been an easy bogey to beat, thanks to the Federal Reserve’s loose monetary policy. For instance, if you have a short investment time horizon, you might compare possible investments to three-month Treasury bills, which today yield a tiny 0.5%. Longer-term investors might look to 10-year Treasury notes, which currently yield almost 2.5%, or even to 10-year inflation-indexed Treasurys, which are paying 0.6% above inflation.

But arguably, for anyone with loans outstanding, the risk-free rate shouldn’t be a Treasury security, but rather the interest rate on their highest-cost debt—and that can be a much tougher benchmark to beat. Let’s say you’re carrying a credit-card balance costing 20% a year. Paying off that balance is likely a smarter bet than any investment, except perhaps funding a 401(k) plan with a matching employer contribution.

Even tax-deductible mortgage debt can prove to be a high hurdle. Suppose you’re in the 25% tax bracket and your mortgage is costing you 4%, so your after-tax cost is 3%. You should be able to outpace that 3% over the long haul by buying stocks. But if you’re inclined to purchase bonds or certificates of deposit, you would probably be better off paying down your mortgage.