Jonathan Clements's Blog, page 464

Moving On

MY LAST COLUMN for The Wall Street Journal appears this week—and, ironically, it’s about self-employment. The Journal recently announced major cuts, including shrinking both the staff and space devoted to personal finance. I decided it was the right time to be moving on—and, while I never heard one way or the other, I’m not sure there would have been a place for my column in the new, smaller personal-finance section.

What’s next? Even without the Journal column, I probably have too much on my plate. I’m in the middle of updating the Jonathan Clements Money Guide for 2016. This fall, I’ll be teaching personal finance at Mercy College in Dobbs Ferry, NY. I’m working on a new book, “How to Think About Money,” which I hope to publish mid-2016. I plan to put out a free email newsletter every few months, starting in September. If you want to receive a copy, shoot me an email. I also have various other projects in the works, as well as a few speaking engagements—something I’d like to do more of in the year ahead.

I plan to continue posting to this site a few times a week. You can also follow me on Facebook at Jonathan Clements Money Guide and on Twitter @ClementsMoney.

Staying Focused

MONEY BUYS LIMITED HAPPINESS because of so-called hedonic adaptation. We’re sure that the new car or the next pay raise will make us endlessly happy. But instead, we quickly get used to these material improvements, and soon we’re hankering after something else.

Is there a way to counter adaptation? One strategy recommended by experts: Pause occasionally, and admire your car or think about your larger paycheck. This act of focusing can help you to recall how happy you were when you got the car and the pay raise, and it can remind you how fortunate you still are.

You can also get yourself to focus by moving things around. At dinner, get everybody to sit in a different place. That’ll allow you to see your house from a different angle—and also your spouse and children.

Similarly, try rearranging the furniture and the pictures on the walls. Suddenly, you’ll find yourself looking with fresh eyes at paintings you had stopped noticing, and admiring the antique end table you had almost forgotten about.

Buying Happiness

“MONEY IS AN OPPORTUNITY for happiness, but it is an opportunity that people routinely squander because the things they think will make them happy often don't,” write Elizabeth Dunn, Daniel Gilbert and Timothy Wilson in an article for the Journal of Consumer Psychology that appeared April 2011—and which, needless to say, I only just got around to reading. It’s arguably the best academic article on money and happiness for the general public, because it’s chock full of practical lessons, plus it has the added virtue of being written with a wry sense of humor.

So how can we buy happiness? The authors mention a number of counter-intuitive notions. We get greater happiness if we spend our money on others rather than on ourselves. We’ll likely get more pleasure from frequent small purchases than occasional big expenditures. We also get more pleasure if we delay purchases rather than buying items right away, because the delay brings with it an enjoyable stretch of anticipation.

The authors suggest that, when assessing the impact of a purchase or event on our lives, we focus less on the big picture—wouldn’t it be great to own a vacation home?—and more on the mundane details, like dealing with maintenance and repairs, because those are a big part of day-to-day happiness.

In addition, the authors note that comparison shopping can lead us to focus on features that aren’t that important. For instance, when house-hunting, we might be drawn to bigger, more expensive homes. But there’s a good chance our home’s size won't prove all that important to our long-run happiness—and yet we could find ourselves spending far more than we should.

Repeat After Me

IF YOUR INVESTMENTS CLIMB in value, hold the champagne—until you figure out whether it’s a onetime gain or a repeatable performance.

Suppose your foreign stocks post gains because the dollar weakens. Or your bonds climb because interest rates fall. Or stocks rise because price-earnings ratios head higher. Or corporate earnings increase because profit margins expand. Or stocks jump because the capital-gains tax rate is cut.

You won’t necessarily give back these gains—and, indeed, the dollar could weaken further, interest rates could drop even more, P/Es might rise yet higher, profit margins could widen further and tax rates might be cut again.

But each of these is a road you can only travel once. For instance, since the early 1980s, the yield on the 10-year Treasury note has fallen from roughly 16% to 2% and the S&P 500 has climbed from seven times earnings to 21 times earnings. Treasury yields can’t fall from 16% to 2% again and the S&P 500’s P/E can’t climb from seven to 21 again—unless we first saw a dramatic market reversal. In other words, these are truly onetime gains.

Moreover, in some of these cases, there are limits to how far these developments can run. Theoretically, the dollar could continuously weaken and P/Es could continuously rise, though neither seems likely and that certainly hasn’t happened historically. But interest rates are unlikely to spend prolonged periods below 0%, profits margins can’t expand so that all of GDP goes to corporate profits and taxes rates can’t be any lower than 0%.

So what would count as a repeatable investment performance? It’s reasonable to expect that bonds will continue to pay interest at their stated yield until they mature. It’s reasonable to expect that, over time, corporate earnings will rise and dividends will be paid. And that’s pretty much it.

Make It Memorable

THIS PAST SATURDAY, we visited my daughter in Philadelphia, where she just bought her first home. The trip included moving furniture, heading to Lowe’s, spackling walls and fixing a toilet seat. We also stopped by Ikea, where Hannah bought two sofas, one for $399 and the other for $379.

Think about that: less than $400 for a sofa. In a major city, for that same $400, you might get a 90-minute visit by a plumber. Or dinner for eight people at a moderately priced restaurant. Or an hour with a lawyer. Put that way, the Ikea sofas were a bargain. They might not have been top quality. But my wife and I agreed that we’d happily have them in our living room.

All this highlights the yawning gap between the cost of mass produced goods and the cost of items that involve personalized service. For $99, you can buy a 7-inch Kindle Fire HD tablet with 8GB of memory that’ll allow you to cruise the web, play games, watch videos, listen to music and more. That $99 would have covered just 0.3% of the commission I paid last year when a real-estate agent sold my Manhattan apartment.

There’s an unfortunate aspect to this: As I’ve noted in other pieces, research suggests we get more happiness from dollars spent on experiences rather than possessions. We quickly adapt to material improvements in our lives. But experiences—a vacation, dinner out with friends, a concert—offer not only enjoyable moments, but also weeks of eager anticipation beforehand and fond memories after.

Problem is, because of the personalized service that’s often involved, experiences can be costly. I love eating out. It’s a great way to enjoy time with friends and family without the distraction of cooking and cleaning dishes. But it’s also expensive.

What to do? Two pieces of advice: First, if you’re going to buy possessions, with the limited happiness that they deliver, favor cheap ones and be leery of expensive choices, with new luxury cars topping the list. Second, plan for experiences far ahead of time, so you have months of pleasurable anticipation, and try to make the experiences memorable, so you’re likely to recall them for a long time after.

Better Than I Thought

I LOVE CORRESPONDING WITH READERS, because I find out what’s on ordinary investors’ minds and hence what might make for a good column. And, occasionally, I learn something unexpected.

This week’s lesson: The potential return on EE savings bonds is much higher than I thought. If you look on TreasuryDirect.gov, you’ll learn that the current interest rate is a meager 0.3%. After 20 years, that would give you a cumulative total return of just 6.2%. Factor in 2% inflation, and the spending power of your money would shrink by almost 29%.

But check out the fine print. On EE bonds, the Treasury guarantees that—if you don’t double your money after 20 years through the regular interest payments—it’ll make a onetime adjustment at the 20-year anniversary, so your cumulative return leaps to 100%. That’s equal to 3.5% a year.

A guaranteed 3.5% a year sounds pretty good. But remember, your annual return will be just 0.3% if you cash in before 20 years, and even lower if you sell in the first five years and pay the penalty equal to three months’ interest. Still, EE bonds aren’t quite the atrocious investment I imagined and, for super-conservative investors, could even be a reasonable choice.

Three Keys to Happiness

SELF-DETERMINATION THEORY posits that we have three basic psychological needs: the need for competence, relatedness and autonomy. These needs—when satisfied—lead to greater motivation and the experience of well-being.

To this, you might respond, what the heck are we talking about? To me, self-determination theory provides a framework for thinking about the connection between happiness and money.

We tend to be happier and more enthused about our daily lives if we’re engaged in activities we feel we’re good at (competence), we’re doing them because we want to rather than because we’re being forced to (autonomy) and we aren’t socially isolated (relatedness). Along the same lines, I believe that, if we’re smart in how we handle our finances, we can use money to boost our happiness in three ways.

First, it can ease our financial worries and help us achieve a sense of financial freedom (autonomy). Second, money can allow us to spend our days doing what we’re passionate about and what we think we excel at (competence). Third, it can make it possible to have special times with friends and family (relatedness).

Something's Got to Give

IF YOU BUY BONDS that pay a fixed rate of interest, your annual investment income will be stable—but the price of your bonds will fluctuate. With cash investments, it’s the reverse: You should never lose money with a savings account or a money-market fund, but the interest you receive will fluctuate along with short-term interest rates.

What about stocks? At first blush, there doesn’t seem to be any stability. Neither the price of your shares, nor the dividends they pay, can be counted on to stay the same. That said, the dividend income from a diversified collection of stocks should be far more stable than the price of those stocks, a topic I touch on in this week’s column.

For instance, over the past 50 years, the S&P 500 has had 12 years when it posted a price decline—but just five years when dividends decreased. Moreover, those dividend decreases were modest compared to some of the price drops suffered—and the long-run trend is impressive. Over the past 50 years, dividends have climbed 5.7% a year, comfortably ahead of the 4.1% inflation rate. That’s why I’m a fan of dividend-oriented stock funds, especially for retirees and those approaching retirement.

Richer But Not Happier

“TAKEN ALL TOGETHER, how would you say things were these days? Would you say that you are very happy, pretty happy or not too happy?” We now have the latest answers to this question, thanks to the release last month of results from the 2014 General Social Survey.

In 2014, 32.5% of Americans said they were very happy, versus a 42-year average of 33.3%. Meanwhile, 27% said they were satisfied with their financial situation, compared with a 42-year average of 29.6%. During this 42-year stretch, U.S. inflation-adjusted per capita disposable income grew 110%. In other words, our standard of living more than doubled—and yet both our overall level of happiness and our satisfaction with our financial situation are below their 42-year averages. Clearly, money hasn’t bought a whole of happiness.

Time, however, may help. Other studies have found that happiness through life is U-shaped, with our level of satisfaction often hitting bottom in our 40s. But this doesn’t show up in the General Social Survey. Instead, the survey found that overall happiness climbs as we grow older. The survey also found that our satisfaction with our financial situation increases with age, as does our job satisfaction.

What Women (Supposedly) Want

WALL STREET LOVES WOMEN—or, at least, it loves to pitch them products through special marketing campaigns. While women’s financial needs differ somewhat from men’s—for instance, they live longer and they’re more likely to need nursing-home care—it’s always struck me that these programs are more about selling than substance.

For further proof, check out this delightful email I received last week: “I recently went to a workshop called ‘Retirement Strategies for Women’ that was put on by Valic.  What did we do for most of the hour? We made a collage! They gave us a small poster and some stickers, and we each expressed what we like to do now that costs money (and what doesn't cost money) and what we hope to do in retirement that costs money (and what we would like to do that doesn't cost money). I think it was a way to visualize why we are saving money. At the end, the Valic representative offered to make appointments with us, presumably to actually discuss ‘retirement strategies,’ but I think more likely to hear about an annuity they are selling.”

My correspondent continued: “Anyway, the Valic woman was nice, and clearly she was following the Valic script, and making a collage was not terrible. But it was pretty ludicrous when you consider how much money some women have these days and the very real financial challenges we face.  Also, most of the women I work with are professionals, and many of us have advanced degrees. Why would anyone at Valic think this is how they should approach us? I doubt they would do this to the men!

“I threw away my collage. But I thought the stickers they gave us to use were very telling of what they assume about women. One was of a kitten and a puppy, one was of sailboats, one showed a fancy dish from a restaurant, one showed a happy couple hiking, one had the word ‘Friends,’ etc. There were entire categories of life that were left out, but we made our collage from the life experiences Valic thinks we value.”