Jonathan Clements's Blog, page 56
March 17, 2025
A Simple Way to Avoid Phone Scams
Then go find the institution’s phone number (from a statement, the back of the credit card, or by typing in the URL of the website itself and finding it on the website; you can’t just search for the website because scammers can manipulate search results) and call the institution yourself.
Financial institutions (banks, credit card companies, brokerage houses, Social Security, the IRS, and on and on) will never call you and ask for information.
This is probably good advice for call from utilities as well.
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The Status of Inherited IRAs in 2025
Here is the link to Christine Benz of Morningstar interviewing Ed Slott, who many consider THE expert in the country on the IRS’s interpretation of IRA laws/rules for 2025.
Ed is a gold mine of information as to how to decide on whether to convert traditional IRAs to Roths, and it’s effect on your beneficiaries.
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March 16, 2025
Active ETFs: Get Ready ‘Cause Here They Come by Steve Abramowitz
“I’m giving you a love that’s true
And gonna make you love me, too
So get ready, get ready
‘Cause here I come.”
adapted from “Get Ready”
The Temptations, 1966
The Motown rhythm and blues quartet may well have divined the arrival of actively managed exchange-traded funds (ETFs). Can’t stop them now, ladies and gentlemen—they’re already here.
Leave it to the frantic asset managers who brought you the load fund and then repackaged it as no load with hidden excessive fees to invent a product to compete with the fabulously successful passive (or index) ETF. The fund purveyors needed to staunch the flow of assets from their high-fee mutual funds to passive ETFs and to convert their longstanding lucrative investment vehicle into one less profitable but more in demand.
A few members of the board arranged in plush leather chairs around a conference table devised a new portfolio wrapper to become known as the active ETF. The creation would combine the best features of passive ETFs—low cost, tax efficiency, flexible trading and transparency. Giddy with their redemption, the executives proceeded to resurrect those tactical acrobats of yesteryear called portfolio managers. They would attract investors alarmed by their absence in passive ETFs.
According to one prominent provider of active ETFs, these trading magicians would “uncover market opportunities and select investments with the goal of outperformance rather than merely tracking an index.” To sweeten the pot, active ETFs would come with a strategically placed price in between that of the inexpensive passive fund and of the exorbitant mutual fund.
Just how menacing is the active incursion onto the ETF landscape? Well, aggressively promoted by the asset management companies, it’s burgeoned beyond all expectation. The number of active ETFs has grown exponentially in the last five years from barely 600 to almost 2,500. Likewise, assets under management have ballooned from about 50 billion to almost 900. Distressingly, about 80% of recent ETF launches had a portfolio manager at the helm. The active ETF phenomenon is a juggernaut.
But is the new vehicle an improvement or even any good at all? Specifically, how does its performance stack up against the formidable passive index fund? I thought I would clarify some of the differences between the two fund types and do an illustrative back-of-the-envelope demonstration of comparative performance.
I first consulted Morningstar’s list of the 28 best active ETFs to buy in 2025 based largely on their proprietary quantitative and analyst ratings. I then selected an active ETF from the T. Rowe Price mutual fund group, a leading provider which earned five of the 28 slots and with which I am familiar. I set out to analyze the Price Growth Stock ETF (TGRW) because of its pedigree and the ready availability of the Vanguard S&P 500 Growth ETF (VOOG) as the passive benchmark.
Let’s start out with an overview of the two contestants. Not surprisingly, both ETFs are classified by Morningstar as covering large growth territory. VOOG has been around a lot longer than recently launched Price Growth and as you might expect it’s a whole lot bigger. The former’s net assets are currently 15 billion as against the latter’s barely a billion. It is also much better diversified, holding about 200 stocks as compared to 60. In addition, the Vanguard portfolio is considerably less concentrated, having a 53% weighting as opposed to 64% in its top ten stocks. As befits growth funds in the recent market environment, both of these carry a high tech position, but Vanguard’s is notably smaller (about 40% rather than 50%).
We have here two funds that are quite similar, but the portfolio manager at Price has taken a more aggressive stance to achieve outperformance. So what happened?
I contrasted the funds’ results in thee calamitous 2022 market and the recovery in 2023. During the sharp decline, the somewhat less risky VOOG proved its mettle, dropping about 30% as its adversary plunged 10% more. This pattern was reversed in the following year’s tech-led burst, rewarding the Growth ETF’s manager for his daring.
But what about this year? How have these two ETFs fared in our chaotic market? The data are not eye-opening but a discussion of the trends is instructive. As of mid-March, VOOG and FGRW lost 8.9% and 10.2%, respectively. Several factors might be at work here. The expense ratio of Price’s growth ETF is .52, modestly below the expense of its mutual fund sibling but unconscionable in relation to VOOG’s .07 cost. Another contributor to the difference in performance may be FGRW’s much higher annual turnover rate of 50%. Its manager has incurred high trading expenses as a consequence of his frenetic quest for outperformance.
Do I hear somebody chortling in the back of the class that the difference in the year-to-date results (10.2% for VOOG, 8.9% for FGRW) is practically-speaking insignificant. I would reply that it’s anything but insignificant if it were to persist in a long-term investment plan. Say you’re 45, planning to retire in 20 years and boast a half a million appreciating in an IRA. Further imagine your son needs long-term care, so you won’t be able to make any more contributions. How much will that half million grow to at 8.9% vs. 10.2%?
With the help of the compound interest calculator at investors.gov, we learn that the seemingly small difference in the two rates yields a stark contrast in returns. The lower rate produces a 3.0 million account balance at age 65, whereas the higher rate yields a final figure of 3.8 million. I submit that an $800,000 difference is indeed significant. Now recall the .45 discrepancy in cost of the two ETFs that will most likely hold about steady across time. Holders of Vanguard’s S&P 500 Growth ETF have that advantage locked in for the duration of their retirement plan.
Now let’s all calm down. This is more a demonstration than it is an upstanding piece of research. The numbers are true, but the time periods are woefully short. To be sure, this is not only a T. Rowe Price problem. It’s endemic to the active fund industry. We will have to “get ready” for the deeper penetration of the active myth into the ETF marketplace. That makes it all the more imperative to fend off for ourselves, our family and our friends the overblown promises of the financial services profession that benefits mightily from all the hoopla. To paraphrase those rhythm and blues lyrics, they want to make you love them, too.
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Like it or not, we all need to pay taxes. Seniors are no exception. Everyone in the pool.
As I do my daily social media surfing I am finding a disturbing trend- anti tax sentiment and one group or another thinking they should be exempt from taxes. We Americans are not among the highest taxed countries and despite the rhetoric, the wealthy do pay the great bulk of taxes.
Seniors seem to be the most vocal looking for tax exemption. Many feel they should be exempt from property taxes and of course, paying taxes on Social Security benefits. I am not referring to seniors living in or near poverty.
I find the calls to exempt seniors from property taxes most disturbing and illogical. Especially as property taxes are the primary source of school funding.
Income taxes on Social Security benefits contribute $50 billion a year to the SS trust and $35 billion to Medicare Part A trust.
To me, looking to avoid taxes without considering what they provide is like saying a family living on credit cards should not have to pay the bill at the end of the month because they earned or deserve what they purchased.
“Earned” and “deserve” are frequently used in posts. Living on a fixed income and inflation are common themes.
Exempting one group of citizens from taxes simply shifts more to another group. Frankly, I don’t think seniors deserve more consideration than a young working family trying to build their future.
Besides, no group of citizens (often without regard to income) receives more benefits, more special treatment, more discounts than seniors. Possibly as a result of a general erroneous mindset that seniors as a group are poor.
Preparing for retirement, a life-long process in my view, includes preparing for taxes of all kinds. The pages of HD are full of discussion on the subject. We all use the tax code to minimize our taxes, but we pay what is necessary - to provide vital services, to have good schools and to assist those in need. That how a good society works. Being fortunate by getting old does not exempt us from that responsibility IMO.
We seniors had a lifetime to prepare for living in old age, without a paycheck. If a person had modest earnings their working life, chances are that will not change in retirement, nor is it a surprise. We knew our income might not grow, we knew inflation was real, we knew we would owe taxes and should have known some would increase.
Sorry, it’s everyone in the pool in my book - while providing necessary assistance to those truly in need.
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March 15, 2025
RDQ considers: A lump sum in lieu of a pension, withdrawal strategies, annuities and other mundane decisions – good luck.
The topic was the difficulty transitioning from saving to using money for retirement income, a topic frequently discussed on HD. The writer said she was getting ready to retire and her husband was already retired. She went on about her own thinking regarding the difficulty of transitioning from saving to spending.
After a few minutes of the discussion about withdrawal strategies, she revealed that in addition to what she and her husband had saved, they both had pensions and, of course, social security. Her husbands pension provided her with a survivor annuity.
She then said she was taking her pension in a lump sum because she wanted total control over her money. Giving up a life annuity income when you have additional resources doesn’t sound like good move to me, especially after saying how difficult the withdrawal strategy would be, what do I know, I’m not a financial columnist. However, I do live on a pension and Social Security and I know the feeling that steady income provides.
Maybe she has enough investing skills to pull it off, but I bet most of the YouTube viewers would be making a mistake. To me the key to a secure, stress-less retirement is a steady income stream that does not require annual withdrawal calculations or decisions or fluctuating income.
The writer gave up the second best source, a pension, not available to many Americans these days. Most people must construct their own income stream.
If I was in that position I would use a portion of my investments to purchase an immediate annuity and I would assure an added income stream with dividends and interest. I see that as simple with few additional decisions needed on an ongoing basis. No guardrails, no ladders, no (significant) worries about the stock market. And it preserves at least a portion of investments.
In fact, to cope with my non-COLA pension, over many years I have built a supplement income stream from bond interest and dividends and because it has been reinvested for over twenty years, the monthly proceeds could now boost our pension income by nearly 20%.
No doubt there are other ways to construct a retirement income stream, better than mine very likely, but I like simplicity even at a cost.
How do people do it, that is, construct their retirement income stream from accumulated savings with minimum effort, maximum stability and minimum stress?
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March 14, 2025
Picture This
Similarly, when it comes to personal finance, I’ve found that certain images can help illustrate important concepts. These are the ones I rely on the most:
1. On Jan. 31, 1940, the very first Social Security check was issued to a woman named Ida May Fuller, who had just turned 65. Her first monthly check was just $22.54, but she continued to collect benefits for the next 35 years, until she died at age 100. Over the course of her long retirement, she collected nearly $23,000 in benefits. If you’re wondering whether it makes sense to delay Social Security so you receive a larger check—guaranteed for life, with adjustments for inflation—it may be worth keeping Ida Fuller in mind.
2. In his book The Psychology of Money, Morgan Housel notes that the concept of compound interest is difficult because the math defies easy mental arithmetic. “If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72).” But, Housel says, “If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode.”
What’s another way to visualize the concept of compound interest? Hard as it is to believe, if you fold a piece of paper in half and then fold it again, and continue folding it 40 more times, the resulting stack of paper would be so high that it would reach the Moon. This illustrates the importance of continuing to stay invested—even during periods of market volatility—so your portfolio can benefit from the power of compounding.
3. In summer 1789, George Washington fired his postmaster general, Ebenezer Hazard. Looking for a new profession, Hazard started an insurance company, which he called the Insurance Company of North America (INA). It’s been through a number of acquisitions over the years, but it still exists today, more than 200 years later. And while INA is the oldest, many insurance companies are 100 or more years old.
What explains this longevity? Credit a financial strategy known as asset-liability matching. To avoid shortfalls, insurers earmark specific funds for each set of expected future claims. While this may be an overly engineered solution for everyday household finances, the concept of earmarking funds is nonetheless useful for financial planning.
4. In the late 1920s, when the stock market was booming, Yale University economist Irving Fisher declared that the stock market had reached a “permanently high plateau.” Just nine days later, the market crashed, ultimately dropping 89% from its peak. Fisher’s proclamation is, in my mind, the best illustration of the danger of recency bias, which is the tendency to extrapolate from recent experience.
5. If you’re in retirement, and the stock market declines, how can you avoid selling when the market is down? The best approach, in my view, is what’s known as the bucket strategy. Instead of thinking about your portfolio as one large pile of savings, segregate it into two or three mental buckets. When the stock market is doing well, you can sell stocks to meet your living expenses. When the market is low, you can lean on your bonds. And when both stocks and bonds are down, as they were in 2022, you can draw from the cash bucket.
6. You’ll notice that the three buckets I proposed don’t include commodities, such as gold. Why not? Warren Buffett once provided this illustration: “If all of [the gold in the world] were melded together, it would form a cube of about 68 feet per side.” At the time, Buffett said, that cube would have been worth about $10 trillion. For that same $10 trillion, an investor could buy all of the farmland in the U.S., plus a fair number of public companies, all of which would produce substantial income each year. By contrast, the cube of gold wouldn’t produce anything.
Gold, Buffett says, “just sits there.” This cube of gold illustrates a concept known as intrinsic value, which refers to the ability of an asset to produce income. Because gold—like cryptocurrency—doesn’t produce income, it’s worth only what the next person is willing to pay. That can make its price volatile and unpredictable.
7. You may be familiar with the Breakers, the 125,000-square-foot Newport mansion built in the 1890s by Cornelius Vanderbilt. At the time, the Vanderbilts were the wealthiest family in the U.S. But just 50 years after Cornelius’s death, the family’s wealth was essentially gone, owing to overspending. The Breakers is thus a reminder that financial planning can be important even for the wealthiest families.
8. When she died in 2016, a Brooklyn woman named Sylvia Bloom left behind an estate worth $9 million. More remarkable than the number, however, was the fact that Bloom had worked as a secretary and never earned a high income. Stories like this appear from time to time. Invariably, the phenomenon is attributed to extreme frugality.
But that’s only part of the story. The more important element, I think, is time. Mrs. Bloom lived to 96. It’s been the same with other notable cases, where someone of modest means was able to leave a huge fortune. While frugality doesn’t hurt, it’s not necessarily the path to wealth. Sometimes, it’s longevity that plays the larger role.
9. Why are exchange-traded funds (ETFs) typically more tax-efficient than traditional mutual funds? With traditional funds, investors can redeem their shares for cash at any time. That’s a good feature, but this can force a mutual fund’s manager to sell holdings, incurring a tax bill that must be shared pro-rata with all of the fund’s shareholders.
This doesn’t happen with ETFs. The way to think about an ETF is that it’s like a basket of investments that’s passed around among investors but, importantly, is never handed back to the issuing fund company for redemption in cash. That means there is never forced selling in an ETF, and that’s a key advantage.
10. On April 1, 1976, Steve Jobs and Steve Wozniak founded Apple. What’s less well known is that they initially had a third partner, a fellow named Ronald Wayne. But Wayne quit just a few weeks after the company got started, and also sold his 10% stake. When he sold his shares, Wayne received just $2,300.
While it’s easy to criticize Wayne’s decision with the benefit of hindsight—some have called it the worst stock trade ever—the reality is that most financial decisions have an element of uncertainty. That’s why I recommend, wherever possible, a “center lane” approach. In Wayne’s case, for example, he could have sold just half his shares.
11. One of the reasons the stock market is endlessly frustrating is because its movements often seem random. At the same time, we’re told there’s a connection between stock prices and corporate profits. To help square this circle, Benjamin Graham, the father of investment analysis, offered this illustration: In the short term, he said, the stock market is like a voting machine. In other words, it’s a popularity contest and not necessarily rational.
But over the long term, the market is more rational. It becomes a “weighing machine,” Graham said. Especially during times of uncertainty, I find this illustration helpful. It gets us to look beyond the news of the day, so we stay invested long enough for compounding to work its magic.
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.The post Picture This appeared first on HumbleDollar.
What Worries You? By Jonathan Clements
A stock market crash
Deteriorating health
Running out of money
Cuts to Social Security
Being alone
Family financial demands
Falling behind inflation
Long-term-care costs
What’ll happen after your death
Being compelled to move
Or does something else top your list of worries? Let’s hear what’s keeping you up night and what you’re doing to address your concerns.
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March 13, 2025
What Would You Take? By Dennis Friedman
Lately, I’ve wondered how I would react if we lost our home and personal belongings in a disaster. Would it break me — financially and emotionally? I don’t think so. However, you never really know until it happens to you.
If a fire destroyed our home, our homeowners association has insurance that would rebuild the exterior structure and the common areas. We would be responsible for the interior and our personal belongings. We have enough insurance that I believe we could rebuild without taking a huge out-of-pocket hit.
My wife and I strive to live a minimalist lifestyle. We don’t have a lot of belongings. We don’t own expensive luxury items. Rachel doesn’t like wearing jewelry, but she does love nice clothes. Most of her clothes come from stores like Talbots and J.Jill, not high-end clothiers. She also loves sales, so she rarely pays full price. Our home is not jam-packed with furniture and electronic gadgets. We drive two economy cars, 2020 Honda Civic and 2007 Honda Fit, so it wouldn’t be a hardship to replace them.
I’m not attached to our stuff, but if there was a fast approaching fire, and we only have a few minutes to evacuate, there are few things that I would grab in a hurry. I would take our medication, cash we stashed for emergencies, and my mother’s old jewelry box that contains my dad’s wedding ring and some of our important documents, such as passports and birth certificates. I would also snatch an old family photo of my parents, sister, and me, with our dog sitting in front of the Christmas tree. It was taken when my dad was trying out the timer on his new camera. It’s the only photo I have of us together with the family dog. At the time, I was just starting college.
As long as Rachel and I can survive a disaster, that’s what matters most to me. Losing Rachel is the one thing that could break me, not the stuff we own.
If you only had a few minutes to evacuate your home in a disaster, what would you take?
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My Favorite Websites
Portfolio Back Test: https://www.portfoliovisualizer.com/analysis
Calculators: Retirement, How long will my money last, Etc. https://www.saving.org
Compound calculator: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
Sector Performance: https://www.barchart.com/stocks/market-performance
https://novelinvestor.com/sector-performance/
Fund overlap: https://www.etfrc.com/index.php
Can you add to my list?
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March 12, 2025
Morningstar’s Report on Comparing 10 Year Returns on Active vs Passive Funds
A Morningstar article published 3/11/25 addressed this subject looking at performance over the past 10 years.
It found that less than one out of every four active funds topped the average of their passive rivals over the 10-year period ended December 2024.
Long-term success rates were highest among bond and real estate funds.
The prospective payoff for choosing a winning fund versus the penalty for picking a loser.
In the case of US large-cap funds, the distributions skew heavily negative.
The opposite tends to be true of fixed-income and real estate categories, where long-term success rates have generally been higher and excess returns among surviving active managers have skewed positive over the past decade.
Finally Morningstar found that funds in the cheapest quintile succeeded more often than funds in the priciest one (28% success rate versus 17%) over the 10 years through 2024.
Morningstar has reported innumerable times that lower cost funds almost always outperform higher cost ones. With so many funds in so many investment categories available, why would anyone pick the high cost fund?
As Jack Bogle was fond of saying, “you get what you don’t pay for”.
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