Jonathan Clements's Blog, page 443

Next to Nothing

YOU CAN BUILD A GREAT PORTFOLIO with just three index funds: a U.S. total stock market fund, an international fund that buys both developed and emerging stock markets, and a high-quality U.S. bond fund. Thanks to the ongoing price war among major index-fund providers, all three funds are now on offer at extraordinarily low annual expenses.

Below are some of the funds available, with their expenses listed in parentheses. These figures come from fund company websites or a fund’s latest annual report:

Total U.S. stock market funds. You can buy mutual funds such as Fidelity Total Market Index Premium Class (0.045%), Schwab Total Stock Market Index Fund (0.03%) and Vanguard Total Stock Market Index Admiral Shares (0.04%). Alternatively, you might purchase exchange-traded funds (ETFs) like iShares Core S&P Total U.S. Stock Market ETF (0.03%), Schwab U.S. Broad Market ETF (0.03%) and Vanguard Total Stock Market ETF (0.04%).

Total international stock funds. The mutual funds on offer include Fidelity Global ex U.S. Index Premium Class (0.11%) and Vanguard FTSE All-World ex-U.S. Index Admiral Shares (0.11%), while ETF buyers might consider iShares Core MSCI Total International Stock ETF (0.11%) and Vanguard FTSE All-World ex-U.S. ETF (0.11%).

Total U.S. bond market funds. Mutual fund buyers can invest in Fidelity U.S. Bond Index Premium Class (0.05%), Schwab U.S. Aggregate Bond Index Fund (0.04%) and Vanguard Total Bond Market Index Admiral Shares (0.05%). ETF investors should check out iShares Core U.S. Aggregate Bond ETF (0.05%), Schwab U.S. Aggregate Bond ETF (0.04%) and Vanguard Total Bond Market ETF (0.05%).

Suppose you were aiming to build a balanced portfolio, with 40% U.S. stocks, 20% foreign shares and 40% high-quality bonds. Using the lowest-cost funds listed above, your weighted average annual expenses would be 0.05%, whether you opted for mutual funds or ETFs. That’s just $50 a year on a $100,000 portfolio.

Because ETFs are listed on the stock market, buyers also incur trading costs, including bid-ask spreads and commissions. By contrast, the mutual funds are all no-load, so there’s no commissions to be paid. Because of trading costs, those who regularly add to their accounts should probably favor mutual funds, while those with a lump sum to invest might opt for ETFs, which could prove marginally more tax-efficient. Either way, the costs are amazingly low—especially compared to actively managed funds, which often charge 1% a year or more.

Keep four caveats in mind. First, to get the low expenses on the Fidelity and Vanguard mutual funds listed above, you need to invest $10,000 per fund. For smaller accounts, annual costs are somewhat higher.

Second, today’s price war is focused largely on flagship funds, such as those listed above. Many more specialized index funds remain relatively expensive.

Third, if you already own one of the funds above, it isn’t worth swapping into another fund with marginally lower expenses: You could incur trading costs and trigger a tax bill, and you might find yourself out of the market for a few days during the switch. On top of that, it could be that the slightly more expensive fund performs better, thanks to securities lending and smarter trading, plus it might be more tax-efficient.

Finally, fund companies could reverse their price cuts. That’s unlikely at Vanguard Group, which aims to operate each fund at cost. But other companies may be barely breaking even at current expense ratios and perhaps even losing money, so there’s a risk they’ll eventually opt to raise expenses.

It’s easy to imagine that happening in a bear market, when investors are no longer in a buying mood. At that juncture, fund companies might feel they can raise expenses with impunity, knowing there aren’t many new investment dollars to attract—and knowing that existing investors would be reluctant to sell, because of the tax bills and trading costs they’d face.

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Five Tips for a Better Trip

MY WIFE AND I JUST GOT BACK from two weeks of travel through Vietnam and Cambodia. For us, traveling strengthens our relationship and reminds us what we want in life. International travel is a luxury—there’s no doubt about it—but it’s also a meaningful experience that is easier to afford if you follow some basic principles before crossing oceans or international borders:

1. Save in advance. Before booking a trip, take the time to build up the funds needed to cover your expected costs. By doing so, you will avoid paying for the trip on credit, or booking a trip that is simply out of your budget. As I mentioned in an earlier post, our approach is to regularly dedicate a portion of each paycheck to our “travel fund,” which we keep in a separate savings account.

2. Pay with a purpose. There are many travel rewards credit cards that not only give you points that can be redeemed to offset hotel and airfare, but also don’t charge any foreign transaction fees. By avoiding those 3% fees, you’ll have more money to spend on souvenirs, lunches and bus tickets.

3. Search strategically. When you’re flexible about your destination but know you want to travel, use one of the many search aggregators, like Kayak’s explore function, to find the best deals. We did this when planning our honeymoon and found cheap direct flights to the Azores. We previously weren’t considering the Azores as a destination, but I now strongly recommend them to friends for an amazing, budget-friendly week that’s off the typical tourist’s radar.

4. Borrow instead of buy. Use your local library and social media friends to get your hands on travel guides and climate-specific gear, instead of purchasing things you’re unlikely to use again. This is an easy way to save initial costs and get good recommendations.

5. Explore the outdoors. Research experiences and outings at your destination that allow you to interact with local culture and be physically active. Often, these are free or low-cost—think visiting neighborhood food markets, hiking and exploring city parks—thus ensuring that some of your time abroad doesn’t cost anything.

Got other travel tips? I’d love to hear them. Please share them in the comments section below.

Zach Blattner’s previous blogs include Zeroing In and Money Pit. Zach is a former teacher and school leader who now teaches teachers across the Philly/Camden region as a faculty member at Relay GSE. He is a self-taught finance nerd who dispenses advice to his wife, friends, family and anyone else willing to listen.

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Retire to What?

AS I PREPARED TO RETIRE at the relatively young age of 55, it was important to me not to become isolated, not to lose touch with the world beyond my home. My husband continues to work, leaving me on my own for much of the day. I consider myself a social person. All my jobs have involved working with employees and customers, from my first job as a delicatessen cashier through to running my own landscape maintenance company with 25 employees and hundreds of accounts.

My father retired at the same age. He moved to the Florida Keys, where he became socially isolated, spending much of his time alone.  He once told me that he hadn’t spoken to anyone in days. And so, as I began a three-year transition into retirement, I wanted to ensure that I maintained touch with the outside world. Those transition years allowed me to ease into retirement and to build on my hobbies and interests.

Prior to retirement, I had thought that, after so many years in the so-called rat race, I would yearn to move to the countryside to lead a more peaceful existence. But after some thought, it occurred to me that, much like my father in the Florida Keys, I would become socially isolated. I like where I live now, able to travel easily into Washington, DC, to visit friends or wander among the monuments and museums.

For many years, I have regularly bicycled. In my home state of Maryland, there’s some of the best cycling in the country. Because of the demands of my job, there was never as much time as I wanted for riding. But on the weekends, I would seek out group rides. That enabled me not only to do a sport I enjoyed, but also to meet new people and develop friendships. Nowadays, in addition to group rides, I occasionally meet up in the early morning hours with fellow cyclists at local coffee shops. This gets me out of the house during the week and lets me stay in touch with those still in the work world.

Volunteering within my community has also allowed me to meet neighbors and remain socially active. It’s gratifying to give back to the neighborhood where I have lived for more than 30 years. During the spring, summer and fall, I coordinate beautification activities within the neighborhood. This is also time that I can spend with my husband, who often joins me in these volunteer activities. Now, as I walk around the neighborhood, I am recognized by others and inevitably a conversation ensues.

The winter months can be difficult. The cold weather makes one want to withdraw and hibernate until spring arrives. It is during these months that I travel. For the time being, much of my traveling is done solo. When I get to my destination, however, I am usually staying with family or joining friends who then travel with me.

I remain involved in the company I built with my twin brother and recently sold. I help with various tasks during the year, and occasionally join employee and manager meetings. This lets me stay in touch with workers who have been part of my life for two decades. The various tasks keep my brain active, something that research suggests can fend off dementia and Alzheimer’s.

I am now 18 months into fulltime retirement. I sense that perhaps I went too far initially—and overscheduled myself. I plan on curtailing my cycling this year, after pedaling more than 11,000 miles last year. I discovered that my aging body didn’t respond well to all those miles. In addition, last year, I helped at an immigrant advocacy organization. I spent many hours volunteering but have decided that, while I enjoyed the work, it was also too much. I can always go back if I find I have idle time that needs filling up. The last thing I want is to be sitting in the armchair every day, flipping through channels.

Nicholas Clements is one of Jonathan’s older brothers. His previous blogs were  Spending Time and Try This at Home.

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This Week/April 2-8

UPGRADE YOUR CREDIT CARDS. If you use one that doesn’t offer cash back or other rewards, swap it for one that does. Pay an annual fee? That might be worth it for the first year if it’s a travel rewards card that offers a large initial bonus. But if you can’t get a retention bonus or the fee waived for year two, you might cancel and get a new card.

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April’s Newsletter

WE CAN DO IT. We can be whoever we want to be. The sky’s the limit. The possibilities are endless. All it takes is hard work and perseverance.

Baloney.

Forget the silly boosterism. Ignore the self-help authors and motivational speakers. Skip the get-rich-quick seminars. If we want to get the most out of our lives and out of our lifetime earnings, we need to toss aside such nonsense and make peace with the limitations we face—a topic I tackle in HumbleDollar’s latest newsletter.

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No, We Can’t

Most of us will never be fabulously wealthy and we’ll never earn huge incomes. Self-help authors, get-rich-quick seminars and motivational speakers might try to convince us otherwise. But if we turn to these folks for assistance, they’re the ones who typically make heaps of money—at our expense.

Such hucksterism doesn’t just carry a short-term cost, however. It also causes us to think about our lives in the wrong way, leaving us with an unwarranted sense of failure and distracting us from the right path forward.

Playing Our Cards. I bristle when I hear people say, “You can be whoever you want to be.” That simply isn’t true. In my 30s and 40s, I used to run races from one mile through to marathons. I never toed a starting line unless I felt in the best shape possible, or pretty darn close. And yet I could only run so fast. I would have loved to knock off a sub-four-minute mile. But it wasn’t in the cards. Not even close. The best I could manage was just below five.

Our physical limitations are easily enumerated. Our other limitations are harder to measure. But they’re just as real.

For instance, psychologists believe we all have a happiness set point: Some of us are simply happier than others. Think about your friends and family, and you’ll quickly realize this is true. Similarly, most of us are well aware of our more obvious individual weaknesses. I’m tone deaf, lousy at advanced math and struggle to learn foreign languages.

Fortunately, we also all have strengths. My skills include understanding financial issues and explaining them in plain English. I have been lucky: Society puts an above-average monetary value on the skills I possess.

No doubt, with more hustle, I could turn my particular set of skills into an even bigger paycheck. But there’s a limit: I’m never going to make CEO-type money. Still, I’m grateful. I live at a time when my abilities are fairly highly valued. A few hundred years ago, being able to explain complicated financial issues in plain English would likely have qualified me to dig ditches.

The bottom line: Most of us could do a better job with the hand we’ve been dealt. But we shouldn’t fool ourselves. We can’t ask for an entirely new hand.

Losing the Magic. How can we get more out of the cards we have been dealt? If we can’t have a career that earns us great gobs of money, maybe we can amass those gobs by hitting an investment home run.

I’ve seen plenty of people try to speculate their way to financial success using all kinds of dubious strategies. They day-trade stocks. They buy investments on margin. They bet everything on a few stocks or a single sector of the market. They trade options. They jump in and out of the stock market, trying to catch upswings and sidestep market declines. They hitch their fortunes to some financial guru. They use a boatload of debt to buy a fistful of rental properties.

Underpinning these strategies is the notion that there’s a single product or strategy that will answer all our financial prayers. It’s out there somewhere. We just need to find it.

But, of course, the search proves futile. There are no magical financial solutions, and yet all too many people spend their entire lives in desperate pursuit.

Finding Our Answers. The reality: We can’t be anybody we want to be and we won’t get rich overnight. The possibilities are not limitless. Our lives are not Disney movies. Except in a few rare instances—where success is often built on a modicum of talent and an excess of luck—we will not earn ridiculous amounts of money and we won’t end up fabulously wealthy.

That might sound like a downer. But in truth, it’s liberating. We can stop hankering after fat paychecks we’ll never collect and wealth we’ll never accumulate. These things were never in the cards. Maybe more important, they aren’t the right yardsticks by which to measure our lives and, if by some slim chance we achieve all that we desire, we would likely be left with a nagging sense of dissatisfaction.

What happens once we put the fanciful nonsense behind us? We free ourselves to focus on getting the most from the money we do have. We can invest to meet our goals, rather than to amass some mythical sum that we imagine will mark us as better people. We can focus on spending our existing dollars wisely, rather than constantly hankering for more. And we can devote our days to doing what we do best, rather than imagining we ought to be doing something else that might be more lucrative—but which we may not enjoy and for which we simply aren’t cut out.

Yesterday’s News

In recent weeks, I have been leafing through—and, in most cases, tossing out—the newspaper and magazine articles I’ve written since 1982, when I started work as a 19-year-old intern at a biweekly suburban newspaper. No surprise here: Many of the articles had little or no lasting value. But in perusing my old personal finance articles, I was also struck by four thoughts:

For most of my career, commentators have worried that stocks are overvalued and that interest rates couldn’t fall much further. One day, I assume, they will indeed be right.
I would occasionally tip my hand on which market segments I thought were attractive, and my track record was no better than a coin flipper. Welcome to the dilemma faced by every personal finance writer: You know the best money advice is timeless, and yet editors demand something newsy that justifies publishing the article today.
Even as I grabbed news hooks, I dwelled on core financial principles in column after column. This was the stuff that was useful—but, in retrospect, I sure sounded like a broken record (and probably still do).
Wall Street has become far friendlier to everyday investors. In many articles from the 1980s and 1990s, my sparring partners were actively managed funds, high investment costs, and commission-collecting brokers and insurance salespeople. But those fights have been largely won. Today, the investment landscape is increasingly dominated by index funds, low expenses and fee-only advisors.

Greatest Hits

These were March’s five most popular blogs:

Take It to the Limit
Unenviable
Another Darn List
Try This at Home
How to Keep All Your Earnings

A blog from late February, Reaping Windfalls, also enjoyed wide readership in March. Meanwhile, the year’s most popular blogs have been Courtside Seat, Did I Say That? and Prosperity’s Pitfalls. Almost every week, I update and add to HumbleDollar’s online Money Guide, including recently revising the statistics on America’s retirement readiness and global market valuations. Want to keep up with the latest from HumbleDollar? Consider following me on Facebook and Twitter.

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Running in Place

OUR STANDARD OF LIVING has more than doubled over the past four decades. Has all that money bought happiness? Not a chance. In 1972, 30% of Americans described themselves as “very happy.” As of 2016, we’re still at 30%, according to the latest General Social Survey.

Over the 44 years, there was a slight uptick in those describing themselves as “pretty happy” and a tiny decline in those who said they were “not too happy,” but neither change was significant. Meanwhile, over this 44-year stretch, inflation-adjusted per capita disposable income rose 120%.

Why hasn’t our improved lifestyle made us happier? There are three key explanations. First, and most important, we tend to adapt to improvements in our standard of living. Our initial delight at, say, a new purchase or a pay raise quickly gives way to dissatisfaction. Second, we focus not just on our absolute standard of living, but also on how we compare to others—and, for most of us, there will always be plenty of folks who have more. Third, we simply aren’t very smart in how we use our money.

What to do? Check out HumbleDollar’s advice on how to squeeze more happiness out of our dollars, as well as our lists of nine simple strategies for a happier life and five takeaways from happiness research.

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Say It Forward

A FEW MONTHS AGO, my retirement account hit a milestone—$250,000. I’d been looking forward to achieving “quarter-millionaire” status for a while, so when it finally happened, I decided to announce it on social media. I took a photo of my computer screen, with the value of my account highlighted, and uploaded the photo. Just as I prepared to make the post public, I decided to obscure the actual balance and edit the text to say my account had reached a “new personal record,” instead of revealing the specific amount.

But why?

I’ve never been reluctant to boast about my other accomplishments. Whenever I win an award at one of the many shooting competitions I attend, I’m quick to brag about it on Facebook. Now, having achieved a personal financial goal, I chose instead to announce it subtly and without specifics.

On any given day, most of us can log on to our social media site-of-choice and read more details about our friends and colleagues than we care to know. People are eager to share what restaurant they’re eating at or talk about the fancy new electronic gadget they just acquired. But the financial details of these transactions are almost always missing. That photo of your friend, happily posing with the family’s new sports car, likely doesn’t include a copy of the transaction’s bill of sale.

A recent study highlighted how deeply conflicted most of us are when it comes to talking about money. A group of university students—who were intending to pursue careers as financial planners—were surveyed about their financial attitudes: There was a stark difference between their personal beliefs and actual behavior. While most thought discussions about money should be active and open, the majority didn’t discuss their own finances with friends and, if they did share information, admitted they were uncomfortable doing so.

Our inability to talk openly about financial topics has resulted in a society that’s left to guess how our own financial status stacks up against others. Outward appearances can be deceiving—friends and acquaintances may seem to be living a life filled with “champagne wishes and caviar dreams”—but a glimpse at their net worth might reveal a financial nightmare. Conversely, there are plenty of anecdotes about men and women who appear impoverished, but who have actually amassed personal fortunes worth millions of dollars.

By keeping financial topics out of the public domain, we now have a society where a majority of Americans can’t make an educated guess about how much money they might need to retire. Without such a goal in mind, how can we expect people to shift their spending and savings habits accordingly? If each of us made a concerted effort to discuss money matters openly, we might discover financial opportunities available to us that we weren’t previously aware of. If we openly shared our account balances and salary information, we might inspire our friends and family to make changes in their own financial habits. As for myself, I’ll start with a pledge: When I officially become a “half-millionaire,” I’ll post it on Facebook for everyone to see.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. She enjoys competitive pistol shooting and hanging out with her dog Zoey. Her previous blogs include Wanting for Something and Where It Goes.

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Smooth Talker

AS INVESTORS FLOCK TO STOCKS in search of heady returns, this is a good time to think about risk. Remember, nobody has a clue how stocks will perform over the short-term, so it’s best to focus on things we can control—namely investment costs, taxes, risk and our savings rate.

Short-term risk is often assessed using beta and standard deviation. I just added a section on those two volatility measures to HumbleDollar’s money guide. While researching the new section, I came across Portfolio Visualizer’s helpful matrix spelling out the correlation between major asset classes. At the site, you can also find the correlation for two or more investments of your choosing.

How do you read the numbers? Correlation coefficients range from -1 to +1. If the correlation between two investments is +1, they rise and fall in sync. If it’s zero, there’s no correlation, while a -1 correlation coefficient indicates they move in opposite directions. If you combine investments whose returns aren’t closely correlated, you should find the resulting portfolio less nerve-racking to own.

Depending on the investments you choose, the price of that smoother ride may be lower long-run returns. In other words, adding bonds to a U.S. stock portfolio can reduce volatility a lot, but it’ll also hurt returns. By contrast, adding foreign shares to a U.S. stock portfolio will reduce volatility only modestly, but it probably won’t put much, if any, dent in your long-run returns—and it could help.

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Tick, Tock, Take Stock

AS A CHILD, I thought my father had a memory problem. He had a habit of repeating stories and sayings. It made me feel sad, until I figured out it was intentional. He didn’t believe in bells: School was never out.

“Make it a habit to keep and grow some of the money you make,” was one of Dad’s sayings. I was reminded of it recently, after reading that seven out of 10 Americans have less than $1,000 in their savings account—the sort of place you might turn if you have a financial emergency. It seems keeping and growing money is infinitely harder than earning and making it.

I am glad I recognized that early on, and started an automated wealth-building program right out of college. Author David Bach popularized this winning strategy in his bestselling book The Automatic Millionaire. What both Bach and Dad seemed to understand is that cash in hand is a bad plan.

I have trouble holding onto money that isn’t saved or invested. Perhaps you do too. It always seems to vanish for one reason or another. Maybe that’s why Warren Buffett advises, “Do not save what is left after spending, but spend what is left after saving.” That’s the power of automatic saving and investing. If I don’t see it, I won’t miss it.

And if you don’t get into the habit of keeping a part of what you earn and putting it to work, you lose a second and even greater opportunity: the opportunity to grow your money over time.

What people don’t always appreciate about compound interest is it is always working for you or against you. If you choose to forego the opportunity to earn interest, it’s an enemy. Let’s say you save $50 a week for 30 years. Without interest, you will have $78,000—and even less once inflation is factored in. But if the money earns 6% compounded annually, it will grow to $218,798. If it earns 8% compounded annually, it will grow to $325,593. It’s math. It’s education. It’s automation. Tick, tock, take stock in the compound clock.

Sam X Renick ’s previous blogs were How to Keep All Your Earnings and Raising Money-Smart Kids. Sam is the driving force behind the “It’s a Habit” Company and its chief spokesperson, Sammy Rabbit , who is dedicated to improving children’s financial literacy. Sam has read and sung off key with over a quarter million children around the world, encouraging them to get in the habit of saving money.

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