Jonathan Clements's Blog, page 446

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THIS PROMISES to be my least exciting blog of the year. I need to tackle four administrative matters. First, many folks who are on my newsletter’s distribution list have discovered it’s landing in their spam folder. To avoid this happening in future, please add my email address to your list of contacts and, if possible, look in your spam folder for the Jan. 1 newsletter and mark it “not spam.”

Second, the Jonathan Clements Money Guide 2016 is now available as a Nook e-book edition. Third, the various versions now available are all updated through Dec. 31. I know it says Dec. 1 at the top of the paperback’s Amazon page, but that simply represents the original publication date.

Finally, many readers have become friends of my personal Facebook page, rather than the Jonathan Clements Money Guide’s Facebook page. I have no problem with that (though you may be disappointed by how dull my life is). Still, if you want to see all of my financial updates, I would encourage you to “like” the Money Guide’s Facebook page.

Five Keys to Financial Wellness

RON LIEBER of the New York Times emailed me earlier in the week, asking for help with a special online feature. The task: Grab a 4x6 index card and, in Ron’s words, “write whatever you want on the *lined* side. A list of 10 things. Or 20 if you write small. A picture. A quote. Whatever. But it should add up to Clements's guide to financial wellness.”

This was trickier than it seemed. The temptation was to focus solely on saving and investing, rather than touching on broader financial issues. The risk was stating the obvious, like “save diligently,” “diversify” and “never carry a credit card balance.” The really tricky part: my bad handwriting. I got my wife to fill out the index card.

You can view the results on NYTimes.com. If you scroll down the article, you’ll find an interactive feature with eight index cards. Don’t just read mine. Also check out the others, all of which are filled with excellent advice. Can’t get access to the New York Times site? Here’s what I cooked up for my index card—all 116 words and numbers:

1. Keep housing, cars and other fixed living costs to less than 50% of income. That’ll mean less financial stress, more cash for fun—and the ability to save gobs of money.

2. Never take on any debt you can’t pay off by retirement.

3. In your 30s, worry what would happen if you died or couldn’t work. In your 60s, worry what would happen if you lived longer than you ever imagined.

4. You can’t control the markets, but you can control risk, taxes and investment costs. Hint: Buy index funds.

5. Want greater happiness? Design a financial life where you spend your days engaged in fulfilling work—and your evenings with friends and family.

Your Financial Plan in 18 Easy Steps

WANT A ROADMAP to guide you through 2016 and the years that follow? Check out my 18 steps for building your own financial plan, which appeared this morning on MarketWatch.com. The article, which is excerpted from the Jonathan Clements Money Guide 2016, brings together a slew of great online calculators that can help you make smarter financial decisions.

You might also want to check out this site's articles page, which I've updated with a handful of recent publications, including my latest newsletter. Are you on my distribution list but didn't receive the newsletter? Check your spam folder--and take the precaution of adding my email address to your list of contacts.

 

Lower Prices—But Not Cheaper

THE S&P 500 SLIPPED 0.7% in 2015. For those who prefer to buy their stocks at reasonable valuations, this should be cause for mild optimism. After all, even as share prices went nowhere over the past 12 months, the U.S. economy was continuing to grow, which means stocks ought to be better value.

Except they aren’t—at least as measured by the S&P 500’s price-earnings (P/E) ratio. As of Dec. 31, the S&P 500 companies were collectively trading at 22.95 times trailing 12-month reported earnings, versus 19.67 a year earlier, according to WSJmarkets.com. What gives? Even as share prices were going nowhere during 2015, corporate earnings were falling, so the market’s P/E has climbed.

Not all the news is bad. As of Dec. 31, the S&P 500 companies were kicking off a dividend yield of 2.14%, versus 1.92% a year earlier, suggesting stocks are now slightly better value. Meanwhile, the S&P 500’s cyclically adjusted price-earnings ratio, which compares current share prices to 10 years of inflation-adjusted earnings, has fallen over the past year, dipping to 25.9 from 26.8, again suggesting that stocks are slightly better value. So should we be more or less bullish? The grim reality: Whichever market yardstick you look at, it would be hard to argue that stocks are cheap.

16 Ways to Improve Your Life in 2016

WANT TO IMPROVE your life in 2016? Check out the 16 suggestions in my latest newsletter. The newsletter also includes some thoughts about bond market risk and news about today's publication of the Jonathan Clements Money Guide 2016, which is updated through yesterday's market close.

Inconsistently Irrational

OUR FINANCIAL IRRATIONALITY has been well documented by academics focused on behavioral finance. But we aren’t just irrational. We are also inconsistent in our irrationality. Here are five examples which, while somewhat amusing, can also have dire financial consequences:

Employees will work for 30 years at a job they hate to qualify for a traditional defined benefit pension, but they wouldn’t dream of delaying Social Security for a few years to get a larger monthly check. Young parents will carry auto policies with low $250 deductibles, and yet they fail to buy life insurance.Folks will load up on groceries whenever there’s a two-for-one special, but they won’t put enough in their employer’s 401(k) plan to get the dollar-for-dollar match.Couples will buy lottery tickets and take vacations in Vegas, but they steer clear of stocks because they are afraid of losing money.People will run screaming with excitement to the shopping mall whenever there’s a 50% off sale, but they’ll also run screaming with terror from the stock market whenever there’s a 50% off sale. 

Not Completely Worthless

INSURANCE IS A WAY to get others to shoulder devastating financial risks that it would be foolish to shoulder on your own. That’s why young parents with few assets need heaps of life insurance—but also why buyers of televisions shouldn’t get the extended warranty. Because the potential financial loss is modest, I’ve often argued that folks should skip not only extended warranties, but also trip-cancellation insurance.

But readers have pushed back, arguing that both types of insurance can make sense—in two particular situations. First, trip-cancellation insurance is a smart idea for seniors, especially when booking expensive vacations, because illness could prevent them from traveling. Second, extended warranties are valuable when buying anything with a screen—such as a phone, tablet or laptop—for a child below, say, age 15. As I look across the living room at my stepdaughter’s cracked iPad, I have to admit it, the extended warranty probably would have been a good idea.

Getting Up There

LIFE EXPECTANCY HAS INCREASED SHARPLY over the past century—if you consider life expectancy as of birth. But if you look at life expectancy as of age 65, which is what matters for retirees, the improvement for the broad U.S. population hasn’t been nearly so impressive, as I discuss in my latest newsletter.

But it’s a different story if you look at more affluent Americans, notes one of my e-mail correspondents, Bob Frey, a financial planner in Bozeman, Mont. He sent along a spreadsheet put together by actuary and financial planner Joe Tomlinson. The spreadsheet details life expectancies as of age 65, but uses data for the wealthy, healthy portion of the population that is likely to purchase income annuities from insurance companies.

The table shows that, as of 2015, the life expectancy for a 65-year-old male is age 88 and for a female it’s age 90. But the real eye-opener is the figure for couples. If both husband and wife are currently age 65, there’s a 50% chance that at least one spouse will live until age 94—and a 25% chance that one spouse will still be alive at age 98.

“While life expectancy increases for the general U.S. population may have slowed a bit, the life expectancies of healthy, well-educated folks have continued to increase at a fairly rapid rate,” Frey writes.

There are two key implications. First, given those life expectancies, it isn’t surprising that income annuities aren’t as generous as many potential buyers would like—but the numbers also suggest that buying more lifetime income could be a smart move for healthy individuals. Second, and most important, the case for delaying Social Security benefits, so you get a larger monthly check, is even stronger than many folks imagine.

Targeting Lower Costs

IN A WORLD OVERFLOWING with mutual funds, I’d like to see Vanguard Group add a few more. How about 12?

I’m a fan of target-date retirement funds, which offer diversified portfolios geared toward folks retiring at or near the year specified in the fund’s name. But Vanguard’s existing 12 funds have a big problem: their annual expenses.

To be sure, the funds’ costs are tiny compared to most others available. Suppose you buy Vanguard Target Retirement 2030, which recently had a mix of 44.8% Vanguard Total Stock Market Index Fund, 29.5% Vanguard Total International Stock Index Fund, 18% Vanguard Total Bond Market Index Fund and 7.7% Vanguard Total International Bond Index Fund. The 2030 fund doesn’t charge any expenses itself, but you incur the expenses of the underlying funds, which come to 0.17%, equal to 17 cents a year for every $100 invested.

Problem is, the 2030 fund owns the Investor Share class of these other funds, each of which typically has a $3,000 minimum investment. But the expenses are even lower for the Admiral Share class, which require a $10,000 minimum investment. The upshot: I can build my own 2030 target-date fund by purchasing the Admiral Shares of the underlying funds, and my weighted average expenses would be 0.09%.

Now imagine that Vanguard offered its target-date funds with an Admiral Share class. To do this, Vanguard would have to launch a new set of funds, rather than adding an Admiral Share class to its existing funds. The reason: As funds-of-funds, Vanguard’s target-date funds pick up the expenses of the underlying funds, so there’s no way to have two share classes with different pricing. 

Setting up new target-date funds might sound troublesome, but Vanguard has done it before. In June, Vanguard launched 12 target-date funds that are available through employer retirement plans. Each fund charges a slim 0.1% a year.

Suppose funds like these were available to individuals who pony up, say, a $10,000 or $20,000 investment minimum, with the funds owning the Admiral Share class of the underlying funds. Suddenly, my financial life would be a whole lot easier. Instead of buying the four underlying funds, I could purchase a single target-date fund and make it my core holding. For added diversification, I would probably add smaller positions in a few other funds, such as investing in small-cap international, real-estate investment trusts and U.S. small-cap value. Still, my portfolio would be notably simpler than it is right now.

Smarter But Homeless

SOARING STUDENT DEBT is putting the kibosh on another major financial goal: buying a home. According to a study by researchers at the Federal Reserve Bank of Cleveland, 40% of those age 18 to 30 have student debt, up from 27% in 2005. For these borrowers, the debt burden is staggering, with student loan payments estimated to devour more than 20% of their income in 2015.

With so much of their income devoted to servicing student loans, these young adults are less likely to buy a house, because they can’t afford to take on a mortgage. Lenders typically don’t want mortgage borrowers to have total monthly debt payments that are above 36% of pretax monthly income. The upshot: The Cleveland Fed researchers found that just 7% of those age 18 to 30 own a home, down from 11% a decade ago.

What’s to be done? Parents may not be able to help with college costs. But they can help by offering sound advice. If your children are unlikely to have high-paying careers, you should encourage them to attend colleges where they are less likely to end up with crippling amounts of debt. For instance, you might suggest they attend a nearby college, so they can live at home and avoid the cost of room and board, which accounts for half of the total tab incurred by in-state students at state universities. Alternatively, you might encourage your teenagers to attend a local community college for two years, and then transfer to a more prestigious college, from which they can then graduate.