Jonathan Clements's Blog, page 452

If Making Money Is Easy, Why Aren’t We All Rich?

REAL ESTATE SEMINARS. Initial public stock offerings. International lotteries. Hedge funds. Franchising opportunities. Penny stocks. Multi-level marketing companies.

This is the American lexicon of easy wealth—and yet the only people who seem to end up rich are those who peddle this nonsense. It’s the story of the California gold rush: Riches accrued not to the miners, but to those who sold them shovels, picks, pans and other supplies.

To be sure, hollow promises and empty hype are rife in other areas of our life. Just check your spam folder for the latest phony diet, male enhancement and nutritional supplement.

Still, the world of money seems especially prone to such garbage. If the financial stakes are low enough, I’m not much bothered. Arguably, if you buy a $1 lottery ticket with an expected payout of 50 cents, you’re getting good value—because, in return for the money lost, you get the chance to dream briefly of riches.

But much of the time, there’s far more than $1 at stake. Real estate seminars can cost $25,000. Hedge funds often charge 2% of assets, plus taking 20% of all investment profits. The psychic pleasure of dreaming a little couldn’t possibly match the price paid.

You might argue that, if the buyers are so naïve, they deserve to be separated from their hard-earned dollars—and I might agree, if a thorough understanding of personal finance were required to graduate high school. But as things stand, I find myself horrified by the shameful fleecing of the ill-informed.

The prosaic reality: For the vast majority of Americans, the only sure road to riches is socking away one dollar after another, month after month, year after year. Nobody’ll pay you $25,000 to deliver that seminar. But it’s the truth.

Stuck In The Middle With You

SINCE EARLY OCTOBER, I’ve been selling signed copies of my new book. As the orders have rolled into my P.O. box, I have noticed an interesting pattern: While there’s some representation from the two Coasts and the South, probably a majority of the orders have come from the middle of the country.

I don’t believe this is happenstance. I hew to a no-nonsense financial philosophy–spend thoughtfully, save diligently, diversify broadly, hold down investment costs, manage taxes, insure against life’s big risks–that appeals to those who are financially prudent. The evidence suggests these views are more prevalent in the middle of the country. For instance, according to Experian, one of the three major credit bureaus, the 10 cities with the highest average credit scores are all in the Midwest, including Minnesota, Wisconsin, South Dakota, North Dakota and Iowa.

The post Stuck In The Middle With You appeared first on HumbleDollar.

Stuck in the Middle With You

SINCE EARLY OCTOBER, I've been selling signed copies of my new book. As the orders have rolled into my P.O. box, I have noticed an interesting pattern: While there's some representation from the two Coasts and the South, probably a majority of the orders have come from the middle of the country.

I don't believe this is happenstance. I hew to a no-nonsense financial philosophy--spend thoughtfully, save diligently, diversify broadly, hold down investment costs, manage taxes, insure against life's big risks--that appeals to those who are financially prudent. The evidence suggests these views are more prevalent in the middle of the country. For instance, according to Experian, one of the three major credit bureaus, the 10 cities with the highest average credit scores are all in the Midwest, including Minnesota, Wisconsin, South Dakota, North Dakota and Iowa. 

Roughly Speaking

PORTFOLIO MANAGERS and financial advisors are apt to depict money management as rigorously analytical, and sometimes even as a science. Maybe that’s inevitable in an endeavor where almost every decision ends up with a number, whether it’s the amount of life insurance to buy, the percentage allocation to emerging markets or the age at which you should claim Social Security.

But just because the answer has precision doesn’t mean this is a precise business. Should you put 65% or 70% of your portfolio in stocks? Should you get a health care policy with a $500 or $1,000 deductible? Should you keep four or six months of living expenses in your emergency fund? You’ll know the right answer in retrospect but, when making the decision, you’re pretty much guessing.

Make no mistake: Managing money is a rough-and-ready business, and what matters is getting the decisions broadly correct. It’s hard to say precisely how much life insurance you should buy, but it’s important to have some coverage if your savings are on the skimpy side and you have a family that’s financially dependent on you. It’s difficult to figure out exactly how much you should have in stocks, but it’s important to have some allocation in your long-term investment portfolio, so you have a decent shot at outpacing inflation and taxes.

The bottom line: You should fret less about getting any particular decision precisely right, and instead worry about whether you’re tackling the right range of issues. Got the perfect rewards credit card? It won’t mean squat if you die without a will or you don’t start saving for retirement until age 50.

The post Roughly Speaking appeared first on HumbleDollar.

Roughly Speaking

PORTFOLIO MANAGERS and financial advisors are apt to depict money management as rigorously analytical, and sometimes even as a science. Maybe that’s inevitable in an endeavor where almost every decision ends up with a number, whether it’s the amount of life insurance to buy, the percentage allocation to emerging markets or the age at which you should claim Social Security.

But just because the answer has precision doesn’t mean this is a precise business. Should you put 65% or 70% of your portfolio in stocks? Should you get a health care policy with a $500 or $1,000 deductible? Should you keep four or six months of living expenses in your emergency fund? You’ll know the right answer in retrospect but, when making the decision, you’re pretty much guessing.

Make no mistake: Managing money is a rough-and-ready business, and what matters is getting the decisions broadly correct. It’s hard to say precisely how much life insurance you should buy, but it’s important to have some coverage if your savings are on the skimpy side and you have a family that’s financially dependent on you. It’s difficult to figure out exactly how much you should have in stocks, but it’s important to have some allocation in your long-term investment portfolio, so you have a decent shot at outpacing inflation and taxes.

The bottom line: You should fret less about getting any particular decision precisely right, and instead worry about whether you’re tackling the right range of issues. Got the perfect rewards credit card? It won’t mean squat if you die without a will or you don’t start saving for retirement until age 50.

Last Call

FORGET FIGHTING the shopping mall crowds on Black Friday. Want signed copies of my new book, How to Think About Money, to give to family, friends, colleagues or clients? To get your autographed copies, send a check—made payable to Jonathan Clements—to P.O. Box 247, Ardsley-on-Hudson, NY 10503-0247.

To cover the cost of the book, shipping and handling, I’m charging $16 each for one or two copies, $15 each if you buy three to nine copies, $13 each if you purchase 10 to 49 books and $12 each if you buy 50 or more. In other words, if you want, say, five copies, it would be $75. Be sure to specify where the books should be sent. To ensure delivery by Dec. 24, please mail all checks by next Wednesday, Nov. 30.

Don’t care about having my scrawl at the front of the book? For $13.99, you can buy the paperback directly from Amazon.com or, alternatively, purchase the $9.99 Kindle or Nook editions. Got questions? Send me an email.

Meanwhile, check out the review of How to Think About Money that was published today by Jim Dahle of WhiteCoatInvestor.com, who says it "might the best financial book I've read in the last 5 years."

Don't Bother Reading This

THE MARKET FOR INTELLIGENT financial writing is, alas, surprisingly small. Why? I believe there are three culprits.

First, many of us don’t care enough about our future selves. Sure, we care somewhat—but not so much that we’ll spend less today, let alone educate ourselves about how to prepare for retirement and other distant goals. Just check out the most popular personal-finance blogs. They focus on topics like coupons, credit cards and juggling debt. Most of us, it seems, are just trying to get by, not get ahead.

Second, we want to believe in magic. Reams of research show conclusively that most investors—professional and amateur—trail the market averages. Yet an article with “10 stocks to buy now” will garner far more eyeballs than a piece on building a globally diversified index-fund portfolio.

Third, we associate sophistication with complexity. But in the financial world, complexity is usually a ruse to bamboozle and fleece investors. Exhibit A: Hedge funds, cash-value life insurance and variable annuities with living benefits, all of which entail exorbitant costs.

The reality is, managing money is best when it is simplest. And yet, if you take the financial world, strip out the nonsense, focus on the simple truths and make them understandable to everyday Americans, readers will complain that “I knew that already” or “that’s obvious”—and then head off in search of strategies with greater bragging rights and lower return potential.

You can sometimes sidestep such complaints by slapping a little lipstick on the pig. With a catchy headline and clever writing, you might convince folks to save more, pay down debt and abandon efforts to beat the stock market averages.

For those who want to read intelligent financial writing, there are still plenty of fine publications, including The New York Times, The Wall Street Journal, Kiplinger’s Personal Finance and Money magazine. But the pages and the number of reporters stacked against sensible personal-finance coverage seem to shrink every year. To be sure, there are some great bloggers who have taken up some of the slack, and you can find fascinating finance conversations every day on Bogleheads.org.

Maybe I’m just being whiny and unrealistic. (It’s been known to happen.) The market for intelligent financial writing has probably always been small. Still, we need it to grow. Thanks to increasing longevity, weakening job security, disappearing pension plans and the rise of 401(k)s, Americans are more responsible for their financial future than ever before—and yet there’s scant evidence we’re any more financially savvy.

Lemons Into Lemonade

AROUND THIS TIME OF YEAR, financial advisors and the media start talking about taking tax losses. The notion: You sell underwater investments in your taxable account, and then use those realized capital losses to offset realized capital gains and up to $3,000 in ordinary income.

There’s nothing wrong with taking tax losses, though I think the notion is oversold. Unless you’re an active trader or a really bad investor, you probably won’t have any losses to take. Let’s say you hold a diversified portfolio. Within a few years, all of your investments should be above your cost basis—and, absent a huge bear market, you’ll never again get the chance to take tax losses.

Still, if you do have a losing investment in your taxable account to sell, the math can be impressive—especially if you don’t have any realized capital gains. Let’s say you have a $3,000 loss on your international stock-index fund. You realize the loss. Because you don’t have any realized gains, you can offset the loss against your ordinary income. If you’re in the 25% tax bracket, that would mean $750 in tax savings.

To maintain your foreign stock exposure, you immediately buy another international fund. You can’t buy the fund you just sold, or one that tracks the same market index, or you could run afoul of the so-called wash-sale rule. Instead, you purchase a fund that tracks a different international index. That fund then rebounds, so you make back your $3,000 loss. If you held the fund for more than a year and then sold, your gain would be taxed at the 15% long-term capital gains rate, assuming you’re still in the 25% income-tax bracket. Result: You’d pay $450 in taxes, or $300 less than your earlier tax savings.

Better still, you’d hang on to the fund, so the tax bill is delayed, allowing you to use the money earmarked for Uncle Sam to earn additional gains. Even better, you might bequeath the fund to your kids—at which point the capital-gains tax bill would disappear.

The Two Financial Numbers You Need to Know

WHAT’S THE STATE of your financial health? Forget your credit score, the past year’s handsome increase in your home’s value or how your salary compares to your brother-in-law’s. In the end, financial fitness comes down to two key numbers.

First, there’s your net worth, which is the value of your assets minus your debts. There’s some debate about what should be included. The easy answer: Don’t delude yourself by counting the value of your car, furniture or Beanie Babies collection.

More contentious: I probably wouldn’t include your primary residence, unless you’re committed to tapping home equity in retirement, either by trading down to a smaller house or taking out a reverse mortgage. Instead, when counting assets, I’d stick with true investments, such as rental properties and money in bank and investment accounts.

Even more contentious: If you aren’t adding in your home’s value, maybe you also shouldn’t subtract any outstanding mortgage debt or, if you do, you should include a mental asterisk. Why the asterisk? If folks go from renter to owner, their net worth would immediately plunge if we ignored their home’s value but took into account mortgage debt—and yet, in all likelihood, their house is worth more than their mortgage. Indeed, eventually, homeowners should end up in much better financial shape than those who continue to rent, because owners lock in their monthly housing costs.

What’s the second key number? How much you add or withdraw from savings each month. There are many folks who see great virtue in carefully tracking how much they spend. I’m not convinced. As I see it, as long as you save enough every month during your working years and don’t spend too much in retirement, it doesn’t much matter whether the dollars you spend are lavished on Jack Daniel’s or Ben & Jerry’s.

In midlife, many families are both adding to savings and have a positive net worth—a pleasant position to be in. Matters are often less comfortable for those who are older and younger. Young adults may be spending less than they earn, but often their net worth is negative, thanks to student loans. Meanwhile, retirees are in the opposite situation, with an impressive net worth, but one that might be slowly shrinking, as they gradually draw down their savings.

Neither situation is necessarily alarming. Young adults have 30 or 40 years of paychecks ahead of them, which they can use to get their debts paid off and turn their net worth from negative to positive. Meanwhile, for retirees, dissaving may be unsustainable in the long run—but, if they are careful, they’ll give out before their nest egg does.

Indeed, you can think of your net worth through life as a broad arc. In your early 20s, it might be negative. But as you pay down debt and add to financial accounts, your net worth should gradually climb, so that you retire with a sum equal to perhaps 12 times your final salary. From there, matters go into reverse, but—fingers crossed—it’ll be a slow reversal.

Cloudy With a Chance of More Clouds

FOR THOSE INCLINED to move in or out of the stock market based on Trump's victory, consider this: Forecasting elections should be relatively easy. All you have to do is identify a representative sample of the U.S. population and then ask them how they'll vote.

By contrast, forecasting the stock market is infinitely more complicated, involving a two-step process: First, you have to predict the economic and political news--and then you have to forecast how investors will react to this news. The bottom line: If the pollsters can't accurately predict an election, do you seriously think you can accurately forecast the direction of stock prices?