Jonathan Clements's Blog, page 53

Paying Your Tuition

OSCAR WILDE ONCE made this observation: “Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught.” In other words, the only way to truly learn something is through experience.

When it comes to investing, this is easier said than done because learning through experience can be expensive. As Warren Buffett once quipped, “It is good to learn from your mistakes. It’s better to learn from other people’s mistakes.”

How can you square this circle? Wilde and Buffett each make good points. I believe both education and experience are key to learning more about investing. How might you approach that?

Let’s start with education. Finance books and articles could fill a library, but there’s no need to read them all. Instead, I’d focus on four important concepts.

1. History. The one thing about the stock market that’s predictable is its unpredictability. New crises frequently come along, and each is different enough to give investors renewed anxiety. In dealing with these crises, what’s most important? In my opinion, it’s perspective. Good investors have a sense of market history that can help them navigate crises better than other investors.

To learn history, you might consult this list of past market crashes. While it’s useful to study U.S. history, this list is global, going back to the Dutch tulip craze in 1637. Lists like this can help us appreciate an unavoidable reality: that crises have always been a feature of investment markets, and likely always will be. While this fact might seem unnerving, knowing this can help us better weather future events.

The investment consulting firm Callan provides another great resource: Its Periodic Table of Investment Returns helps investors appreciate the largely random nature of markets and thus the futility of making predictions.

For a more comprehensive study of market history, turn to William Bernstein’s 2002 book The Four Pillars of Investing . One of the four pillars is dedicated to history. As Bernstein puts it, markets periodically go “barking mad.” But by studying history, investors have “at least a fighting chance” at recognizing and understanding the madness when we see it. A second edition was published in 2023.

2. Psychology. I believe understanding market psychology is as important as studying market history. Benjamin Graham’s The Intelligent Investor is a good place to start. In a preface to the book, Warren Buffett notes that he first came across Graham’s book 75 years ago: “I thought then that it was by far the best book about investing ever written. I still think it is.” Why? Graham explains market psychology by way of a parable.

Mr. Market is a fellow who can’t control his emotions. Sometimes he’s rational, Graham says, but sometimes “his enthusiasm or his fears run away with him.” Mr. Market’s behavior is representative of the market as a whole. That’s why, Graham says, investors “should neither be concerned by sizable declines nor become excited by sizable advances.”

3. Statistics. How should we think about star investors who seem to be able to beat the market? In his book Fooled by Randomness , retired investor Nassim Taleb offers this illustration: “If one puts an infinite number of monkeys in front of (strongly built) typewriters, and lets them clap away, there is a certainty that one of them would come out with an exact version of the Iliad.”

Taleb acknowledges that the probability is “ridiculously low,” but he uses this idea to explain why we should never be too impressed by investors who manage to beat the market. In short, Taleb ascribes this to random chance. Each year, there will always be investment managers who end up way ahead, but there will be very few, Taleb points out, who are able to beat the market multiple years in a row. 

Taleb’s book is 20 years old, but more recent data still confirm his argument. Each year, Standard & Poor’s publishes its “Index vs. Active” report comparing the performance of actively managed funds to their benchmarks. In any given one-year period, somewhat more than half of active funds underperform. But over longer periods, upwards of 80% or 90% of active funds lag behind.

4. Simplicity. Retired money manager Peter Lynch commented that investing “is both an art and a science,” but added that “too much of either is a dangerous thing.”

To illustrate Lynch’s comment, I recommend the book When Genius Failed . It tells the story of a group of Nobel Prize winners who started a hedge fund based on highly quantitative strategies. While the fund was successful, their combined pedigree and early accomplishments led to an overconfidence in the system they’d built. The result was a financial meltdown so severe that the Federal Reserve stepped in to stabilize the situation.

The lesson: While complex investment strategies may seem compelling, I believe simplicity for most investors most of the time is a more reliable strategy. For more on that point, you might like a book titled The Simple Path to Wealth .

Another recommendation: Longtime journalist and investment manager Barry Ritholtz recently published an entertaining volume titled How Not to Invest . The book is a field guide to avoiding the worst of what he calls bad ideas, bad numbers and bad behavior. The idea is to keep things simple.

What about Oscar Wilde’s comment that we need to learn through experience? There’s truth to it. In addition to this recommended reading, I suggest that investors—especially those just getting started—experiment a little. What should you buy? To answer this question, we can look to Albert Einstein.

At one point in his life, Einstein owned a small sailboat which he named Tinef—German for “piece of junk.” Because it wasn’t very seaworthy, he often ended up on the rocks. But Einstein continued to sail the Tinef, even refusing a motor that a friend bought for him. He preferred wandering and exploring, even if it didn’t always end well.

If you want to learn more about investing rather than by reading about it, I suggest taking a page from Einstein’s book. Explore a bit. If you have a favorite product, try buying the company’s stock. Interested in cryptocurrency? You could put a few dollars into one of the new bitcoin exchange-traded funds. In short, you might explore some of the investments that—according to the data—aren’t necessarily recommended. As long as the amounts are modest, I believe this is an effective way to learn.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

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Lessons Learned from Taking Care of a 102 Year Old in Her Final Year

As I have written before in April of last year my wife and I decided to take in my 102 year old mother in law when her second husband, whom she married at 93, was sent to a nursing home. Amazingly that resulted in moving her out of their independent senior housing apartment.

Well she peacefully passed way yesterday morning at the age of just days past 103 1/4. As my wife’s cousin said in call yesterday, “ amazing, but she didn’t break the record of (my mother in law’s) aunt Edith (103 1/2 in 1988).”

I’ve always have read about what people have learned when reflecting on a loved one’s life when caring for them in their final days, and thought, yeah, right. However, I have found out it is true.

In the coming weeks and months I have decided to share some of these thoughts on what I learned and how it will hopefully, with a lot of help, change me as a person.

WARNING: These posts will have nothing to do with money as she always lived on very little.

But for the present time, it’s time for family to gather and celebrate a truly amazing woman’s amazing life.

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Seeking Certainty

WE WANT OUR STOCKS to behave like bonds, and our bonds to behave like cash investments. That leads to all kinds of portfolio contortions—some of them damaging to our investment results.

Remember, risk is the price we pay to earn higher returns. Many folks want those higher returns, but they’re anxious to avoid risk. Chalk it up to loss aversion: We get far more pain from losses than pleasure from gains.

Result? Think about stock-market strategies like purchasing equity-indexed annuities and writing covered call options. Equity-indexed annuities capture part of the market’s upside while guaranteeing against losses—assuming the buyer owns the annuity for long enough. Meanwhile, writing call options allows folks to collect extra income in the form of option premiums, providing a small buffer against market declines, but the price is a cap on potential stock-market gains.

As investors look to limit losses, however, the biggest portfolio contortions tend to revolve around bonds, not stocks. The strategies employed typically involve favoring individual bonds over bond funds, and then holding those bonds to maturity. This can add a fair amount of complexity, especially if folks build elaborate bond ladders, with each rung designed to cover a particular year’s spending.

No doubt about it, there’s some reward for this complexity. If we buy an individual bond and hold it until it matures, we know exactly how much interest we’ll receive each year and how much we’ll get back upon maturity. Sound appealing? My advice: Before buying into the notion that bond funds are riskier than individual bonds, and that holding individual bonds to maturity eliminates risk, we should ask ourselves four questions:

Bailing early. Where’s the certainty if life intervenes, as it often does, and we’re compelled to sell our individual bonds before maturity? How easy will it be to sell the bonds in the secondary market, and could we receive far less than the bond’s par value?
Worrying about pennies. If we’re willing to own stocks and run the risk of steep short-term losses, should we really get hot and bothered because we don’t know precisely what a bond fund will be worth when we’ll need our money back in, say, 10 years?
No safety in numbers. Are we really reducing our financial peril if we trade the diversification of bond funds for the single-issuer risk of an individual bond? Is the added risk involved worth it, given that the return of an intermediate bond fund will likely be similar to that of an intermediate individual bond of comparable credit quality?
Losing to inflation. Where’s the certainty in knowing that each of our individual bonds will be worth $1,000 upon maturity, but we have no idea what the purchasing power of that $1,000 will be?

To be sure, the risk of individual securities is reduced if we stick with Treasury bonds, which most experts believe carry scant risk of default. Worried about inflation? That can be addressed with inflation-indexed Treasurys and Series I savings bonds.

Still, I’ve never owned an individual bond, except a $75 EE savings bond I won for finishing second in a 5k road race. Why not? I’m not that concerned that my bond funds might be worth a few percent more or less than I’d hoped when it’s time to cash out. Why would I? Heck, I’ve lived through two 50%-plus stock market declines during my investing career, so modest fluctuations in bond prices hardly seem worth the worry.

Meanwhile, I simply don’t want the hassle and complexity of dealing with individual bonds, including Treasurys and savings bonds, and I sure don’t want to bequeath that sort of portfolio to my family. Given all the complaints I’ve read about dealing with TreasuryDirect, and especially cashing in Series I and EE savings bonds, I’m glad I made that choice.

But many readers, I know, strongly disagree.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier posts.

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Recommendations for Free Portfolio Analyzer?

For years I've used Vanguard's "Portfolio Watch" feature, which provides portfolio analysis of assets held at Vanguard as well as those held at outside investment firms.

I've liked the Vanguard analyzer since, by agreeing to its aggregator feature via Yodlee (now owned by Investnet), it will update on a daily basis all your holdings' values and analyze them as far as stock/bonds/cash; foreign/domestic; large cap/midcap/smallcap; growth/blend/value; etc. And it likewise analyzes your bond holdings as to credit quality, interest rate sensitivity, etc.

The catch is you have to provide the login credentials for your outside accounts, and as I read the fine print at Schwab, where my outside accounts are held, sharing your login credentials voids their promise to reimburse you for any loss of funds due to unauthorized activity. There may have been some discussion of this here on HD but I also read about this concern on the Bogleheads forum.

So I decided to unlink my Schwab accounts from Vanguard. The fact that there seems to have been a fairly dramatic change in the way Vanguard analyzes portfolios---without any warning or explanation---contributed to my decision.

I'm looking for a new place where I can enter all my brokerage and retirement accounts and get a decent analysis in the manner Vanguard used to provide. For the reasons stated, I don't want an aggregator which will login to my accounts. Rather, I'm willing to set it up manually, entering each holding and the number of shares. Ideally, the analyzer will update the stock prices each day, but I'll need to enter any changes in number of shares.

I know many folks use the Morningstar X-ray tool, but as an inveterate cheapskate I'm unwilling to pay $249 a year for that service. Does anyone have a recommendation for a free or very low cost portfolio analyzer they have used and are happy with?

Thanks for any suggestions.

 

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I’m concerned about the stock market. How concerned are you? Jonathan, any comforting words?

I know the markets go up and down. I know anyone living from investments knows that as well. I know many people say they plan for it with various strategies.

However, we seem to be living in an environment like never before. Chaos and uncertainty is the norm on a daily basis here and around the world. The stock markets are reflecting it all.

I’ve seen my investments drop and it concerns me even though they are not providing living income.

Are you concerned? Am I overstating the situation?

Jonathan, how about more words of wisdom? Anything unique about the current state of the markets?

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Three bucket strategy for financing retirement

There have been a number of articles and forum questions on best strategies for managing finances during retirement.

The choice, of course, depends on the individual situation. I came across this "three bucket" strategy that is intriguing.

First bucket is cash that meets near term needs ( one to two years of living expenses other than guaranteed income like social security.  This avoids withdrawal of investment funds during market downturns, particularly in early retirement years, which could cause "sequence of return risk" resulting in running out of money in later years.

The second bucket, covering the next five years, could be in bonds and bond funds. Income distributions will make up for spending from the cash bucket, when needed.

The third bucket is all stocks, focused on long term growth depending on risk tolerance.

This article explains more:

https://www.cnbc.com/2025/03/25/retirees-protect-portfolios-stock-market-downturn.html

What are the pros and cons of such a strategy? Are you already practicing some strategy like this?

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An Insignificant Sum?

I spent 30 years working for a US megacorp: however, I joined the company in the UK. I was on the UK payroll for about six years, and therefore a very small part of my pension is paid by the UK company (with COLA). I was astounded, when I applied for Social Security, to find that the US government was going to reduce my benefit by the amount of my UK pension.

How did that make sense? I had not paid into SS during those years, so they were excluded from the calculation of my benefit. If, instead of working in the UK, I had stayed home with a small child in the US, I would have the same number of missing years in my SS record, but I would have kept the entire payment.

There wasn't anything I could do about it, and I figured it wasn't a large sum, but it was annoying. Obviously, I was pleased by the repeal of this “Windfall Elimination Provision” (Windfall? What windfall?) effective January of 2024. My monthly payment has increased by $50 and last month SS deposited an additional $700 in my checking account, for January 2024 through February 2025. I had written the deduction off as a lost cause, and not much money, but it actually works out that the government kept $6,300.

I seem to remember someone complaining about the elimination of the WEP here recently. I am not complaining.

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401(k) Savings Limits

When I was working, I saved the maximum to my 401(k) account. So, I always kept up with the plan’s savings limits. If you haven’t heard, there are higher savings limits for 401(k) plans in 2025, plus a new “super catch-up” category. And it’s still early enough in the year for salaried workers to take advantage of them.

Thanks to an inflation adjustment, the maximum regular contribution to a 401(k) plan has increased by $500 to $23,500 in 2025. Workers ages 50 to 59 or 64+ can save $7,500 more in “catch-up” contributions in 2025, or $31,000 total.

New in 2025 is the super catch-up category, allowing workers aged 60 to 63 to mount a savings charge before retiring. They can save $11,250 in catch-up contributions—or $34,750 total—to their 401(k) account this year.

Which brings me to the fly in the ointment. With savings limits this high, most workers don’t make enough to ring the top bell. In 2023, only 14% of workers contributed the maximum to their retirement plan, according to Vanguard’s How America Saves 2024, which analyzes the behaviors of some 5 million plan participants.

Here’s my low-stress saving suggestion. Don’t try to leap over the high bar in one go. Instead, if you’re working, raise your savings by 1% of your pay. I didn’t feel much difference in my take-home pay when I did. Then do it again next year, and so on. Maybe you‘ll hit the savings limit, or maybe you won’t. But you should be able to retire someday.

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Quinn’s grand new way to plan for a secure retirement. It’s called the McDonalds strategy

Last year I earned $16.68 an hour - sort of. That’s more than the minimum wage in all but the District of Columbia and for California fast food workers who earn $20 and hour. Fast food workers are mostly part-time, I on the other hand are no time.

That hourly rate is my dividends and interest converted to a equivalent full-time employment. 🤑 I suspect capital gains would boost that a bit- or maybe not this year.

Given I don’t do a thing to earn that income, it is truly passive and a pretty neat system if you think about - and nearly everyone can do it-create passive income that is. 

Have I stumbled on a new retirement planning concept? A new income replacement theory? What is a good passive hourly income rate relative to working hourly income rate? Can Monte (or even a spreadsheet) handle such a complex concept? 🤑

The only thing is, how do you, in advance, determine the passive income that will be generated from your aggregate investments? I guess if you dump cash in bonds, you know the interest to be paid. If you buy stocks for dividends you know that rate. 

By George! There it is, and capital gains are icing on the cake - just like OT or a bonus.  😃

Oh wait, ✋we still need your income replacement needs, how much of your working hourly rate do you need in retirement? Please don’t ask me.

However, at the next meeting with your financial advisor just say you want to earn 50% more per hour than a McDonalds employee in California. Or maybe 75% or 100%. $30.00 an hour gets you $62,400 a year. 😱

Careful, the minimum wage goes up most years. 

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Mirror, Mirror On The Wall

They say at 20 years of age you have the face that nature gave you.  At 40, you have the face life gave you and at 60, you have the face you deserve. This is a variation on a quote attributed to both George Orwell, author and essayist, and Coco Chanel, fashion maven. If this is true, it means  that our choices and attitudes leave an indelible mark on our character which ultimately surfaces in our physical appearance.

Each one of us has the responsibility for the kindness, warmth and openness that our faces communicate.  I found no better example of this than while undergoing medical treatments. It is cold in the infusion room—and as Rosemary, the infusion nurse, bends over me to button up my sweater, I am touched by her tender and motherly gesture.  Few can say why some faces seem beautiful as beauty is not only skin deep, it lies deep within our soul.

As for me, I once had the face of a capable,  self reliant, ambitious, joyful young girl. I now see the face of a thoughtful woman who has known pleasures and sorrows, a patient caregiver, a possessor of a cheerful and grateful heart. And I’m reminded that a beautiful or handsome face and figure go just so far.

And so my question is, what is it about you that you would like people to see when they meet you:

Your humor
Your kindness
Your positive outlook
Your sense of compassion
Your values

Can you add any particular qualities and characteristics that have given you the face you deserve?

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