Jonathan Clements's Blog, page 59

What’s It All About?

WE'RE ALWAYS STRIVING—the next pay raise, the next consumer purchase, the next self-improvement goal. But to what end?

Our time on this earth is fleeting, our impact minimal and our legacy quickly forgotten. A decade after we’re gone, we might be remembered by family and close friends, but not by many others. And yet we keep pushing forward.

Does death’s approach shed any light on this curious behavior? Far from it. If anything, my cancer diagnosis has pushed me to strive even more. You might dismiss this as denial of what’s certain to come or perhaps a desperate grab for control in a world where I no longer have much say over my destiny.

Alternatively, you might view this as some mix of selfishness and selflessness. For the religiously inclined, perhaps I’m aiming to leave the world very marginally better for the sake of God’s glory and my own immortal soul. For the more secular, maybe my goal is to ensure my family—and hence my genes—have a better shot at surviving and reproducing.

But while I’m not sure what propels my continued striving, even at this late stage, I know it makes me feel better. As I mentioned last week, accomplishment can deliver great happiness. That brings me to the final article I wrote for The Wall Street Journal before I left in 2008 to work for six years at Citigroup, or what my journalism friends would call "the dark side."

In that piece, I listed what I felt were the three components of a happy life: a sense of security, the freedom to pursue our passions, and a robust network of friends and family.

We all want slightly different versions of these things, but I believe the hunger for all three is almost universal. Together, they have the potential to leave us feeling safe, fulfilled and happy—innate desires that we carry with us throughout our life.

Do pursuing these three things make the world a better place? Perhaps marginally. They certainly don’t seem like pursuits that should hurt those around us.

Meanwhile, they help to make every day that much sweeter. And ever since I got my cancer diagnosis, that has been my goal: I want every day to be a good day.

Faced with my grim diagnosis, I’ve refused to be angry about my misfortune, or dwell on why I got unlucky, or rail about the years I won’t have. Why waste time on such emotions? Instead, my focus has been on making the most of the days I have left.

No, not every day has been happy. Life’s hassles have a way of intruding, and those hassles have grated even more because my time is short. Meanwhile, deteriorating health is obviously no fun.

On top of that, those around me have bad days, and their distress inevitably taints my waking hours. But I view this unhappiness differently. Unlike the hassle of leaking toilets or the distress of failing health, sadness—whether it’s our own or that of others—is part of the human experience, and adds a richness to it. With shared sadness, we can draw closer to others, and those tighter human connections can make life more meaningful.

Over the decades, I’ve written a lot about money and happiness, and yet “happiness” has always struck me as the wrong word, and academic alternatives like “subjective well-being” and “life satisfaction” don’t seem any better.

Yes, happiness is a key component of a good life, but it’s hardly the only one. Instead, robust happiness encompasses not just laughter and good times, but also feeling fulfilled, a sense of purpose, a passion for life, a sense of contentment, and a feeling we’re engaged with both others and with the broader world. It’s the sense we’re truly alive and focused on what we really want and care about. Such things, I believe, are always worth striving for—even when our time is measured not in decades, but in weeks and months.

Check out the earlier five articles in this six-part series: Money Grows up,  Taking Center Stage, Mind Over Money, Taking It Personally and Never Enough.

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

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Overdoing It

TWO THINGS HEAVILY influenced my financial life. The first was my short stint after college as an internal revenue agent with the IRS. The second was getting married and having five children.

Result: I’ve spent most of my adult life as a tax-averse junky using retirement accounts to get my high, so much so that there’s a risk our retirement-account withdrawals will put us in a much higher tax bracket than when we made our contributions. I’m age 67 and Cindy is 58, and today we have 98% of our financial assets in retirement accounts.

I was an internal revenue agent from 1981 to 1983. I quit because it seemed everybody who I met either hated me or was scared to death of me. Still, the job convinced me that I should legally avoid taxes at all costs. But how? Starting in 1981, 401(k)s became fairly common. The following year, traditional IRAs became available to workers with pensions. That’s when I started funding IRAs, which were then limited to $2,000 a year. I really liked the idea of avoiding taxes until retirement, which at the time was some 40 years away.

I married at age 31 and my wife was 22. Opposites attract: I was a saver and Cindy was a spender. We often clashed over spending. We never made a lot of money and budgeting never worked for us. But we agreed on one important subject, and that was having children.

I noticed that whatever we put into our checking account would mysteriously disappear by the end of the month. There were a lot of arguments over the years. We both thought that our marriage wouldn’t make it. After all, money arguments are the No. 1 reason marriages fail.

After one bitter argument, I went into my payroll account and increased the withholding for my 401(k) by a couple of percent. It made me feel better, and it seemed preferable to arguing over how much we spent. I later did the same with my wife’s withholding.

After we started having kids, it didn’t make sense for Cindy to continue working full-time. She worked one day a week as a bank teller for 12 years, before going back full-time. While she was working part-time, I made sure that we contributed the maximum each year to both our IRAs. I also contributed a large percentage to my 401(k).

It was at this time that I started buying tax software. Before we would file our taxes, I’d use the software to run “what if” scenarios, so we could use our child tax credits in conjunction with retirement-account contributions to zero out our tax liability.

Eventually, because of our large tax-deductible retirement contributions, we got to the point where we couldn’t use all of our tax credits. Still, we continued to make those retirement contributions. But we also started converting traditional IRAs to Roths, which led to more potentially taxable income and allowed us to use up the credits without generating a tax liability. During this time, I was working up to three jobs, including my part-time employment in the Army Reserve, where I served until age 60. I retired from my civilian job at 59.

How did my wife take all this?

Cindy didn’t really like it, but somehow money put into retirement accounts would never get touched. Contributions served two purposes. They increased our retirement savings, while also limiting our spending. My feeling was, if things got too tight, we could always lower our retirement contributions or take a loan against our 401(k) balances. The loans only happened a few times for small amounts.

Our arguments over money grew less frequent. Any time I thought Cindy was spending too much, I’d remind myself that we were still super-saving for retirement, and my anger would pass.

Our five children picked up on our tight-money ways. They attended public colleges in Kentucky that are relatively inexpensive. They had part-time jobs and paid internships during high school and college. They also received multiple merit-based scholarships, though no non-merit aid. One lived at home during college.

Even though we gave our children little financial help toward college, each graduated with money in the bank and no debt. Our last child graduated when I was age 65. Four are engineers and one is an elementary school teacher. Three have master’s degrees. Believe me, we’ve had other major problems with our children, but handling money hasn’t been one of them.

We’ve continued converting our traditional IRAs to Roths long after our eligibility for the child tax credit passed. Yep, we’re actually paying taxes now, but keeping it in the 12% bracket. Today, about 21% of our retirement accounts are Roths. I plan on continuing to convert until I start drawing Social Security at age 70 or perhaps until required minimum distributions begin at 73—provided, that is, we can remain within the 12% tax bracket.

Cindy still works full-time. She contributes the max to her 401(k), and we also max out our IRAs. She’ll retire next July at age 59. We pretty much live on my Army Reserve pension, a tiny pension from a civilian job, and whatever is left from Cindy’s salary after her 401(k) contributions.

More disciplined people could no doubt have done better. But we’re both happy with how things have worked out. We now splurge more on our adult children and grandchildren. We can also eat out and travel without worrying about money. In fact, I suspect we enjoy these things more than most—because we’ve done so little of them in the past.

Ken Begley has worked for the IRS and as an accountant, a college director of student financial aid and a newspaper columnist, and he also spent 42 years on active and reserve service with the U.S. Navy and Army. Now retired, Ken likes to spend his time with his family, especially his grandchildren, and as a volunteer with Kentucky's Marion County Veterans Honor Guard performing last rites at military funerals. Check out Ken's earlier articles.

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Easy Does It

ONE OF MY FIRST employers allowed me to buy savings bonds through withholding from my weekly salary. It seemed like magic. Ever since, automatic payroll deductions have been an important part of my financial life.

My payroll deductions expanded to include my health insurance and my 401(k) contributions. It just felt good to me, kind of like the practice of regularly giving 10% of your income to the church.

On the other hand, payroll deductions are also how we pay taxes, which doesn’t seem like such a blessing. This culminates with the annual ritual of filing my income tax return. That’s when I learn whether I’ve withheld enough.

I’ve never used a preparer or accountant to calculate how much tax I owe. I prefer to avoid paying someone else to do something I can do myself. That’s my fallback position for many such chores. If I can do it myself, I will. I’ll pay someone for the harder things, like fixing my teeth or repairing my car.

Besides, when I do my own taxes, the government checks my work. If I make an arithmetic error, I get a letter from the IRS or my state’s tax department. It points out my mistake and informs me how much more I owe or—on a good day—how much more the government owes me.

To be honest, I’m not sure whether my do-it-yourself method has saved me money. If I miss a deduction to which I’m entitled, I’m paying an extra tax for my stubborn independence.

I started feeling more confident that I was getting my fair share of all the tax breaks when I began using TurboTax. The software asks a lot of questions that I’d never thought about to help me explore possible ways to save on taxes.

Yet there’s still a problem: TurboTax won’t challenge me if my entries are wrong. Luckily, whenever I’ve misunderstood a question—and seen the resulting taxes I owe—I’ve been able to backtrack and correct my misinterpretation.

In the end, TurboTax tells you how much you owe or the amount of your refund. I find it unsettling, wondering whether the taxman is going to demand more of my income. So far, I’ve never been in a position where the amount demanded has exceeded my ability to pay. Still, tax season is a stressful time for me and, I imagine, for many others.

This stress leads me to prefer to be owed a refund rather than having to write a check to the Treasury.  I know, I know, I’ve heard it many times: Why make an interest-free loan to the government? Just pay Uncle Sam what you owe and no more. In the meantime, use your money to your own advantage. I get it.

It’s just that I hate paying for anything. Writing a check for underpaid taxes is something I want to avoid. I wish I could justify my feelings, but I can’t. When I calculate my tax return, if money is due to me, I’m relieved. I give the government my bank information and, magically, the money appears. I can relax for another year. Over the years, most of the credit for this relief has been due to my faithful ally—automatic payroll deduction.

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One Stock at a Time

THERE’S A CHANGE coming in the way many of us invest. But for background, it’s important first to look at a related—though seemingly mundane—investment concept known as tax-loss harvesting.

To understand how tax-loss harvesting works, consider a simple example. Suppose you purchased a stock in your taxable account for $10, and it subsequently dropped to $8. That would be unfortunate, but there’d be a silver lining: You could sell the stock to capture the $2 loss for tax purposes and then reinvest the proceeds in another stock.

Like most topics in personal finance, tax-loss harvesting is the subject of some debate. Detractors argue that the tax benefit is something of an illusion. Continuing with the above example, critics would point out that a tax-loss harvesting trade would cause the investor’s cost basis to drop, and that, in their view, would negate any benefit.

Why? The new stock’s basis would be $8, whereas the original stock’s basis was $10. That’s important because it means that when the new stock is eventually sold, the taxable gain will be $2 greater than the gain would’ve been on the original stock. And that additional $2 of gain would perfectly offset the $2 loss that was captured earlier. It’s for this reason that some compare tax-loss harvesting to a shell game: They argue that it can shift a gain from one year to another, but never truly eliminate it.

In a narrow sense, the critics have a point. But there are many cases in which harvesting losses can yield tangible benefits. Suppose you’re in retirement and taking regular withdrawals from your portfolio. In that situation, tax-loss harvesting could help you moderate the capital gains on those withdrawals.

Continuing with the example above, if you took a $2 loss on one investment, you could pair that with a $2 gain on another investment. That would allow you to free up cash from your portfolio without any net tax liability. In that way, tax-loss harvesting can help retirees keep a lid on their tax bill when drawing down a taxable account.

Even before retirement, tax-loss harvesting can be a benefit. That’s because even the most dedicated buy-and-hold investor will want to make changes to their investments from time to time, if only for rebalancing. And that’s another key benefit of tax-loss harvesting. It can help investors rebalance—and thus manage risk—more tax-efficiently.

Those are the benefits of tax-loss harvesting. But you might notice a fly in the ointment. After the strong market we’ve enjoyed over the past decade, it might be hard to find holdings with any losses to harvest. Over the past 10 years, the S&P 500 has risen 250%. Even international stocks, which are seen as laggards, have gained nearly 70% over that period. That would appear to be an obstacle to tax-loss harvesting. In other words, it’s hard to harvest losses if there are no losses to harvest. For index fund investors, this is indeed a challenge.

But now imagine that if, instead of owning a broad-market index like the S&P 500, you instead owned each of the 500 stocks individually. Then, as you looked across your portfolio, there would be both winners and losers. While Nvidia has gained 25,000% over the past 10 years, stocks like Walgreens, Warner Brothers and American Airlines have each dropped more than 50%. Forty stocks, in fact, have lost money over that period. Nearly 300 of the 500 stocks in the S&P index have gained less than the index’s overall average. If you owned these stocks individually, they’d offer opportunities to take withdrawals from a portfolio more efficiently than if you owned the index only in the form of a fund.

Wouldn’t it be cumbersome, though, to own 500 stocks individually? That brings us to a strategy known as direct indexing. It’s a way to own the individual stocks in an index, and to conduct regular tax-loss harvesting, without needing to manage the portfolio yourself. Direct indexing has existed for decades. But in the past, because of the cost, it only made sense for the wealthiest investors.

In recent years, however, brokerage commissions have largely been eliminated, and new competitors—including Vanguard Group—have helped bring down the cost. As a result, these services now cost as little as 0.15% or 0.2% a year. Yes, that’s more than a comparable index fund. But according to at least one study, the tax benefits can easily offset that cost.

In addition to the tax benefit, direct indexing offers two other advantages. First, it offers the ability to customize a portfolio. Suppose there’s an industry that runs counter to your values—tobacco, for example. With a direct indexed portfolio, you could own all of the stocks in the S&P 500, with the exception of Altria and Philip Morris, leaving you with your own custom S&P 498. With direct indexing, you could also overweight selected industries.

Another benefit of direct indexing: Suppose you have a large holding in a single stock—Apple, for example. Because of the risk, you might want to diversify. But if you bought an S&P 500 index fund—ordinarily a good way to diversify—that would pose a problem, because 7% of any dollars invested in the S&P 500 would be allocated to Apple, further increasing your exposure.

But with direct indexing, you could construct a portfolio that included all of the stocks in the index except Apple. A further benefit: Over time, losses produced by the direct indexing strategy could be used to offset gains as you whittled back your Apple shares.

Are there downsides to direct indexing? As noted earlier, there’s the cost. In addition, some people dislike the idea of holding hundreds of individual stocks; it seems messy.

Another downside of direct indexing is that the tax benefits are front-loaded. Over time, as the market rises, there will be fewer losses available to harvest. Still, I believe direct indexing can continue to provide tax benefits far into the future. Even if, after a decade or two, most stocks in a portfolio have gains, there’ll always be some stocks that have gained more than others.

Result: At any given time, if you were looking to take a withdrawal, there’d still be a tax benefit even if none of your holdings had losses. You could cherry pick from among your holdings to limit the gains on each sale. Moreover, to meet charitable goals, you could donate the most appreciated shares, such as Apple or Nvidia, thus sidestepping the gains.

Another potential risk with direct indexing is that a portfolio can ossify over time. Without the benefit of new cash, the ability to make changes can become constrained by unrealized gains. And this can cause a direct indexed portfolio to slowly drift away from its benchmark. This is where mutual funds have an advantage. Because there are always investors coming and going, mutual funds have the benefit of being able to deploy new cash on a daily basis, and that gives them the ability to stay right in line with an index.

For these reasons, I don’t recommend direct indexing as a substitute for index funds. But I do see it as a good complement. It is, I think, a strategy well worth considering.

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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Never Enough

MANY FINANCIAL IDEAS are tough to embrace. But perhaps the toughest can be summed up in one simple word: enough.

Will we ever feel like we have enough and that we’ve accomplished enough? Accepting that we have enough and done enough might seem like worthy goals, a serene acceptance that’s possible for those at peace with themselves and the world around them. Indeed, for many, “retirement” and “enough” seem to be pretty much synonymous, a declaration that the pursuit of “more” is over.

But that isn’t where my head is. Even now, I’m not sure I’ll ever declare “I’m done,” which is weird, because I sure don’t have the time to do much about it.

And I don’t think I’m alone. In their 60s, and with decades potentially ahead, I suspect many retirees—and perhaps most—aren’t quite done, and I’m not sure it’s necessary. There’s great pleasure to be had in life’s striving. While we might want to temper our pursuit of more, I’m not sure we should seek to squash it entirely.

Amassing more. We spend our lives running on the hedonic treadmill, imagining the next accomplishment—the new house, the seven-figure portfolio, the promotion—is all that stands between us and happiness, only to discover that success soon leaves us dissatisfied and hankering after something else.

This desire for more doesn’t seem to disappear with retirement. Most of us spend three-plus decades amassing money to fund our post-work life and yet, when the time comes, we’re often reluctant to let our dollars go. How many times have you read HumbleDollar commenters gleefully note that their portfolio today is larger than when they retired?

Such sentiments are understandable. After a lifetime of saving, it’s hard to watch our money slip away. And if an ever-growing portfolio brings someone happiness, why should the rest of us object?

Still, the desire for more can create two key problems. First, consider the comment from financial author Bill Bernstein: “When you’ve won the game, stop playing with the money you really need.” In their pursuit of an ever-larger portfolio, retirees might take too much risk—and imperil their financial future.

Second, folks may shortchange their retirement by failing to spend in ways that could enhance their happiness during their final years. This, I think, is one virtue of Social Security benefits, pensions, immediate fixed annuities and laddered bond portfolios. All are designed to generate income, so folks feel they have permission to spend the money involved.

Struggling to let go of the dollars you’ve amassed? Consider making gifts to charity and loved ones. These aren’t just an alternative to spending. Such gifts are also an acknowledgment that we have enough—and the resulting sense of abundance may prompt us to be more generous with ourselves.

Scoring goals. Even as we struggle to accept that we’ve amassed enough, we’re also reluctant to declare that we’ve done enough.

Humans are a restless, relentless bunch, always looking to improve their lives in one way or another. This drive, I’d argue, is a good thing: It not only helps the individuals involved, but also it can spur economic growth and make society a better place for everyone.

Yes, retirees and those near the end of their career will often proclaim that they’ve reached the point where they’ve done enough, and they’re now happy to cruise through their remaining years. But I’m not entirely sure I believe them.

These folks might be content to step off the workplace hamster wheel, and they might fiercely resist my frequent suggestion that they consider working part-time during their early retirement years. Yet retirees often replace their professional aspirations with goals of their own choosing, such as reading a book every week, or visiting all 50 states, or pursuing their favorite hobby. And I see nothing wrong with that. There’s great happiness to be had from accomplishment.

Will we ever feel like we’ve done enough? I suspect not. We might be willing to declare that we’re done with career goals, but I doubt most of us will ever feel like we have nothing left to achieve.

Still, we might try to cut ourselves a little slack, especially as we age. How? I like to make a daily to-do list, preferably one that isn’t too long, so I know what success looks like for that day. Clearing each day’s list allows me to head into evening with a pleasurable sense of accomplishment—and the chance to recharge and reflect before tackling the next day’s list.

Check out the four earlier articles in this six-part series: Money Grows up,  Taking Center Stage, Mind Over Money and Taking It Personally.

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

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My House Divided

I'M A HOUSEHOLD of one—in theory. True, one adult child lives rent-free in our family home in California. Her first full-time job’s wages are too low for her to afford an apartment in our expensive urban area.

I’m also paying college expenses for another daughter living on campus 80 miles away. She’s working part-time and will graduate this coming spring semester. With a STEM (science, technology, engineering and math) degree, I hope she’ll find gainful full-time employment soon after.

My son is in Wyoming finishing up an alternative high school program. He just landed his first paid internship at an agricultural lab, the first step toward a career in environmental science. I provided the security deposits to get him into his first apartment. I also drop a bit of money into his bank account at random intervals. I do the same for his sisters, just to take the edge off early adulthood.

Finally, wherever I reside, I share quarters with the family dog. So, I’m never entirely a household of one. Yet I wonder if my living situation will simplify as my children take flight.

Due to my frugality and some luck, I have choices when answering these four key questions:

Where do I want to be?
What do I want to do?
Who will accompany me?
How much will all this cost?

This last financial question causes me more angst than the existential where-what-who kind because there’s less opportunity to recover from any significant money mistakes I may make in retirement. To ease my concerns, I’ve considered selling the family house in California, rather than continuing to spend energy and money tending to it.

After half a lifetime there, however, I wonder how it would feel to lose my old neighborhood. A song from the scouting bonfires of my youth comes to mind: Make new friends, but keep the old. One is silver and the other gold.

When I look around, though, my neighborhood has more youthful faces of late and fewer longtime residents like me. Shops and restaurants have also changed, to match newcomers’ preferences.

So, where do I truly want to live? There’s no contest. I’m passionate about my recently acquired immobile home in Tucson. It’s been an exciting challenge to maintain my new, fragile manse, while also enjoying local treasures like the Arizona Sonoran Desert Museum.

My brother and sister-in-law live here, and I’m also forming new friendships. Driving over the cinematic Gates Pass, I explore the sprawling metropolitan area I now call my second home, winter and summer.

Still, I’m unprepared to sell the family home in California. To begin with, I’ve filled every corner and cupboard to the rafters. Clearing it out is proving a slow chore.

I also have a sensual connection. When I’m in the old place, I savor walking its red oak floors barefoot, a sensation that’s hard to replicate on vinyl planks in my ersatz fishing cabin.

When given a choice, do both. The B-side to life could see me living in my tin shack with periodic visits to the big house. Whenever I’m at the old place, I enjoy the kids’ company. For now, I’ll age in two places until I can no longer enjoy both houses or can’t manage the travel. Thankfully, I have the health and cash flow (almost) to support this strategy.

Still, I’d like to reduce my fixed costs. The big house’s single biggest fixed expense is its property tax bill, which is manageable. I can pass along my relatively low property tax rate to my children. This oddity of California real estate law has created a strategy of families passing houses down, more in the European style.

One home on my block will eventually belong to the great-granddaughter of its original builder. It’s conceivable that a similar future awaits my home as well.

To be sure, my overall tax expense is pretty high. Happily, most of this obligation derives from adequate income rather than my property taxes. Still, state and federal income taxes, property taxes and sales taxes amount to a big bite when combined.

Arizona’s flat personal income tax is 2.5%, while California’s progressive income tax ranges from 1% to 13%. Last year, I paid 3.6% of my California adjusted gross income to the state. The lower rate in Arizona does reduce my overall income tax payments a bit. The savings are enough to cover my weekly hamburgers with my brother over at Tiny’s on Ajo Highway.

Part-year living in Arizona reduces my gasoline expenses, as well. The gas tax is 19 cents a gallon in Arizona, versus 68 cents in California. A gallon of gas costs $3.39 in Arizona, while California’s gasoline recently averaged $4.74 a gallon. Another half-dollar price increase could result from the latest change in the carbon standard for California’s special blend.

I don’t drive all that much, though, so my savings are comparatively small. Despite all my grumbling when filling my car’s gas tank in California, I calculate my gas savings at less than $500 a year.

Arizona’s state sales tax is 5.6%, though Tucson’s local additions push it to 8.7%. Meanwhile, California’s state sales tax is 7.25%, but my local rate there is 8.75%. That makes shopping in either city roughly comparable. I can achieve greater savings by simply not buying things I don’t need.

As a thought experiment, I imagine how much I’d save by leaving California behind for good. If I sold the house, I’d save $1,095 annually in property insurance, $4,611 in property taxes, $2,364 for city utilities (trash and sewer), and around $3,200 for natural gas and electricity.

As I compare fixed costs, it helps to have already chosen an affordable landing zone. In Arizona, I only pay about $500 a year in property tax and insurance, a tenth of my California expenses. My tin can casita is all-electric, which I estimate will cost around $700 a year.

All in all, I’d be saving $11,570 in fixed expenses by becoming a year-round resident of the desert. With savings like these available, it should be no surprise that some 700,000 California residents moved out of the state in 2022, according to the California Legislative Analyst’s Office.

Yet I’m choosing to maintain two homes, an admittedly costly position. To defray my expenses, I could start charging my kids rent of $1,000 a month. That would be a bargain over what they’d pay elsewhere. Still, since much of my estate will go to them later, charging rent seems like taking money out of one pocket and putting it in another.

One of the heaviest expenses I shoulder is the cost of insurance, which will reach $24,875 in 2025. This covers a lot of policies: medical and dental for me and two of my children, a small life insurance policy and long-term-care insurance for me, auto insurance for me and two young drivers and, finally, two homeowner’s policies.

I might be overinsured. But in the five years since my spouse’s unexpected death, I’ve leaned toward extra protection. To save on insurance, I plan to up my deductibles and reduce coverage.

I have other ideas about cutting my expenses, starting with dropping the Disney Channel. I also plan to sell an actively managed fund to invest in a lower-cost index fund.

Finally, I’ll be easing the kids off the family phone plan. This may not be cutting the apron strings entirely, but it’s a start.

Catherine Horiuchi is retired from the University of San Francisco's School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine's earlier articles.

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As Evening Approaches

I'VE BEEN THINKING a lot about my mortality. I’m sure it has to do with Jonathan's battle with cancer, along with losing some close friends over the past few years. Maybe that’s one reason I've been thinking about contacting some long-lost friends.

Roger was a college friend who I’ve considered getting in touch with. I believe I’ve found his current address, and I was going to reach out to him by sending him a Neil Young album with my phone number attached. We were both huge fans back then.

I was 23 when I last saw Roger. It was 1974, at the old Fox Theater in Venice, California. He called to tell me that Neil Young’s movie, Journey Through the Past , was playing there. It was a late-night triple feature, which included two Jimi Hendrix films. I still remember all those folks dressed up like Hendrix. Roger and I were dressed like Young, wearing our old flannel shirts and worn-out jeans.

But I decided it might not be such a good idea to contact Roger because, when I read some of my old high school friend’s comments on social media, they weren’t anything like what I thought they’d be. Maybe it's best that I just keep the memory I have of Roger when we were young.

There’s one person from my past who hasn’t changed over the years: my old neighbor Jane, who I’ve known for about 35 years. I’ve always admired Jane. She has the kind of relationship I always thought I wanted.

Ever since I’ve known Jane, she and Bill have been a couple. During all those years, they never married. When they aren’t at each other's place, they both have their own homes where they can spend time alone. I used to see Bill in the apartment building’s lobby, getting the Sunday morning newspaper in his robe and slippers. I would sometimes see him drop Jane off in front of the building, with her overnight bag.

When Rachel and I were an unmarried couple in our 60s, we both wanted something more than what Jane and Bill had. We tried living like them. But we both knew that not sharing a residence wasn't going to work for us. We wanted to commit to an enduring relationship. We married, sold our homes and moved into the house I inherited.

Not too long ago, I was having lunch with a friend and he asked if I had a prenuptial agreement before I got married. I told him no. He then reached out to give me a fist bump. I didn’t really know what to make of it. Brian is a lawyer and I thought he would have advised me to get one. But he didn’t.

Now, when I think about our marriage, I believe Rachel has more to lose than I do. She also has significant assets, but—because of our age—she’s more at risk of losing her physical and emotional well-being if she becomes my caregiver. I’m 73 and she’s 67.

It’s why I have become more open-minded about living in a continuing care retirement community, or CCRC. I don’t want to burden Rachel with the responsibility of taking care of me. It’s also the main reason I work hard at taking care of my health. I don’t just owe it to myself. I also owe it to her.

Of course, we don’t know how our lives will play out. Which one of us will need long-term care and for how long? Maybe neither of us. But for now, we both decided to stay where we’re at. We’re still more than capable of taking care of ourselves.

There is, however, a CCRC that’s not too far from where we live. It's a nonprofit, and within walking distance to a major university and large park. It has independent living apartments, along with assisted living, long-term skilled nursing, short-term rehabilitation and memory care, all in the same location. The CCRC requires a refundable or nonrefundable deposit, with the latter giving you priority entrance to their medical facility.

But there’s one major hurdle that I don’t think I can get over: After being released from hospital, my mother died in the CCRC’s rehabilitation facility. I don’t like driving past the place, let alone the thought of one day finding myself there as a patient. It brings back too many unpleasant memories.

We’ll continue to look into CCRCs, while hoping our health holds up like our neighbor Sue. She’s in her 90s and lives alone, with some help from her daughter. I wrote about not seeing her for a while. We thought something terrible might have happened to her when her daughter drove off with some of her belongings. We found out later she was on a cruise.

That, unfortunately, is what happens when you don’t see an elderly person for a while: You fear the worst.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor's degree in history and an MBA. A self-described "humble investor," he likes reading historical novels and about personal finance. Follow Dennis on X @DMFrie and check out his earlier articles.

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One Man’s Junk

IN MY NEIGHBORHOOD, there are signs saying “we buy junk houses” and “we buy ugly houses.” These businesses target undesirable homes—those that have fallen on hard times and can’t be easily sold.

Maybe the homeowners couldn’t afford the upkeep or got tired of caring for the place. Whatever the reason, the result is houses that look sad and have lost market value. Contrarian buyers see the houses not for what they are, but for what they could be. They need to have a vision, plus the money and skills to turn a beast into a beauty.

You’ve probably seen these buyers profiled on TV shows about house flippers. They tear out the ugly and replace it with stylish features that appeal to today’s buyers. Sleek kitchens. Remodeled bathrooms. Updated entertainment areas. Potential buyers flock to these formerly unloved houses.

I’m witnessing a similar trend among old cars. Auctioneers routinely sell cars from the 1950s and 1960s that have gone through a makeover. The cars are either returned to their original showroom sparkle or they’ve been customized.

The customized cars, like the remodeled houses, are transformed according to the designer’s wishes. Years ago, these transformed cars didn’t find a strong market. Buyers preferred cars that had been restored to their original condition.

Then the market turned. Customized cars had better brakes, power steering, more reliable engines, and creature comforts like air-conditioning and a booming stereo. What buyers got was a car that appeared vintage but worked like a new model. That combination—a car that looked like you might have driven it in high school, but now with up-to-date features—has proved irresistible.

In my neighborhood, when people no longer want something, they leave it at the curb. If the neighbors want it, they’ll grab it. Otherwise, it will get scooped up by junkmen who circle the neighborhood in the early morning hours, piling old stuff into pickup trucks.

There’s also a population of artists who take discarded relics and transform them into sculptures. When you see their work up close, and realize what it’s made from, it’s alluring. An unwanted item has been transformed into a thing of beauty.

There’s even a cycle like this for people. At some stage in our careers, we were a thing of beauty. We were desired by our employers. We could switch jobs and negotiate a higher starting salary. We had the talents, skills and abilities that were in demand. We could market ourselves as someone desirable. We were the “in" thing.

Then we retire. Some of us start to feel like that neglected house, rusted car or unwanted sofa on the curb. We no longer shine. We can’t keep up with others. We step aside, willingly or not.

What can we do? We can remodel ourselves. We can go from what was to what could be. We can open ourselves up to new possibilities. We don’t have to accept rejection as the final word.

We can think, “What if?” When we adopt this kind of thinking, we change our focus from looking down to looking up. Remodeling ourselves may not be easy. We may not be able to do what we once did, so we have to look at our life from a different perspective. What can I do next?

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Blame Game

FIFTY YEARS AGO, when the first index funds were getting started, critics wasted no time attacking the idea. They called it “un-American” and a “sure path to mediocrity.”

But over time, indexing has grown to the point where it now accounts for more than half of all U.S. mutual fund assets. Last year, research firm Morningstar declared that “index funds have officially won.” But this victory seems to have only increased the level of criticism.

In an interview last year, David Einhorn, a longtime hedge fund manager, argued that markets are “fundamentally broken” and that passive investing—that is, index funds—are the cause. Here’s how he explained it: As more investors go the route of indexing, the result is that more active managers close up shop. That, in turn, means that fewer research analysts are following individual stocks. In Einhorn’s words, there is now, as a result, “complete apathy” in certain parts of the market.

Many smaller companies, Einhorn says, are almost entirely overlooked. “There’s entire segments now… where there’s literally nobody paying any attention.” That’s because the remaining active managers tend to focus their energies on larger companies. Now, even when small companies issue positive news, Einhorn says, their stock prices often don’t react because there aren’t enough investors following them. “These companies could announce almost anything other than a sale of the company and nobody would notice.”

This is a problem, Einhorn says, because he feels it’s caused share prices in many cases to become distorted. The large stocks that dominate the top end of the market—Apple, Amazon, Microsoft and so forth—continue to rise because they’re so visible. But lesser-known companies can see their stocks stagnate even when they’re doing well.

Einhorn quotes a colleague, who liked to say that, “a bargain that remains a bargain is no bargain.” In other words, a growing number of active managers these days are giving up on stock-picking because they worry that they won’t be rewarded even if they do everything right. To the extent that successful stock-picking was always difficult, it’s become even harder. “So what happens is instead of stocks reverting toward value, they actually diverge from value,” he says.

Academics have looked at this question and reached similar conclusions. In a paper titled “How Competitive Is the Stock Market?” a team of researchers confirms that the stock market has fundamentally changed. By examining the trading decisions of institutional investors, they found that investors today exhibit the “apathy” that Einhorn has observed. This is a problem because it means that share prices today are less reflective of companies’ true value.

Versions of this debate have been around for years, with market observers worrying what might happen if, over time, everybody became index fund investors. In theory, under that extreme scenario, stock prices would never change—because there would be no research analysts following the developments at each company, and thus no one would be motivated to bid stock prices up or down. Einhorn’s picture of “literally nobody paying any attention” would be extended to the entire market.

But what if something short of 100% of the market were indexers—what if maybe 90% or 95% of investors chose to index? Would the remaining 5% or 10% be enough for the stock market to remain efficient—that is, to help keep stock prices in line with the profits of their underlying companies?

For years, as index funds have grown, this is how the question has been framed. But in a paper published last year, the economist Owen Lamont argued that this isn’t the right perspective. Whether the market remains efficient doesn’t depend on how many active investors remain. Instead, Lamont says, what matters is which active investors remain.

“If the 50 smartest and best-informed investors switch to passive, then yes, it could make prices less informative.” But, Lamont says, “If the 50 craziest and least informed switch, then maybe market prices get more informative. What matters is who stays in the market.”

That certainly makes sense. Even if just a small number of active investors remain, stock prices could nonetheless remain reasonable, as long as the remaining active investors aren’t the ones who are “the craziest and least informed.”

On this point, one market observer has weighed in with a discouraging observation. Cliff Asness is a longtime hedge fund manager. In a recent paper titled “The Less-Efficient Market Hypothesis,” he argues that the internet—and social media, in particular—have caused the market to become less efficient. In his view, what we’re seeing is indeed closer to the 50 craziest investors taking over active management rather than the 50 smartest and best-informed.

Asness calls the investors who dominate social media today “a coordinated clueless and even dangerous mob.” You’ll recall, for example, the so-called meme stock craze from 2021. A YouTube personality calling himself Roaring Kitty took the lead in driving up the share price of the failing retailer GameStop to irrational levels.

What’s the implication for individual investors? While notable, the GameStop episode was a mostly isolated incident, and the reality is that we don’t know right now which way things will go—whether it will be the “clueless mob” or “the 50 smartest people” who will have more impact on share prices going forward.

If current trends continue, though, one conclusion is that those who continue stock-picking may experience markets that are more volatile and more unpredictable. That’s because, as more active managers exit, a smaller and smaller number of investors will be able to trigger more significant price moves. And because social media gives greater visibility to online personalities like Roaring Kitty, those price movements may be more irrational than they were in the past.

What are the implications for index fund investors? Einhorn’s observation about the ghost-town effect among smaller stocks suggests that broad-market indexes may be relatively more stable—for now. The reality, though, is that no one can say for sure, because the market hasn’t gone through a transition like this before.

It’s also a difficult phenomenon to quantify. There’s no reliable barometer for the level of irrationality in the market. We can point to individual cases like GameStop where prices clearly became irrational. But that was the exception. When, for example, Nvidia shares dropped 17% in one day last week, was that a rational move? It’s an open question.

The bottom line: The market is definitely in the midst of a transition, but the exact contours of this transition are still an open question. In the past, I’ve felt that investors’ best and only defense was to diversify broadly. That may be even more true today.

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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Taking It Personally

WHICH FINANCIAL dangers should we focus on? The possibilities seem pretty much endless. In fact, five years ago, I decided to make a list—and ended up offering readers 50 shades of risk.

Yet our notion of risk used to be far more circumscribed.

In the late 1980s, when I started writing about personal finance, insurance was considered important, but it wasn’t much discussed. Instead, the only risk that seemed to merit serious analysis was investment risk, and that could supposedly be captured by a single, objective measure: volatility.

This approach had intellectual appeal. By focusing on volatility, experts could sidestep a thorny issue—the fact that some investors were totally freaked out by investment price swings, while others remained unperturbed.

As data on historical market returns became more readily available, talk of short-term volatility was joined by discussion of longer-term risk. How likely was an investment to make money over one, five, 10 and 20 years? Once again, it was all about the numbers, with investors themselves strangely absent from the conversation.

The good news: Today’s discussions of risk are more nuanced, reflecting an awareness that the danger from misfortune is matched by the damage that can be done by our own behavior. Consider the typical stock-market cycle. Thanks to research by behavioral-finance experts, we now have a pretty good idea of how investors’ thinking changes along with the market.

What goes up. The goal of investing may be to buy low and sell high. But at market bottoms, when stocks might be available at 30% or 40% below their bull-market peak, we’re often frozen in place, fearful our own actions will make matters worse. Sins of commission and sins of omission can both cause financial pain, but sins of commission are much more likely to trigger pangs of regret.

As share prices tick higher, some of us will look to sell, as we recoup part or all of our losses. We’re anchored to the price we paid for our investments or to our portfolio’s highest value, and we’re anxious to sell before recent gains turn to losses once again. It’s the old “get even, then get out” syndrome.

Others, meanwhile, take the market’s short-term gain and extrapolate it into the future, prompting them to invest even more in stocks. Like the soothsayers of old, we study the market’s entrails, trying to divine the future by spotting patterns in today’s share-price movements. Our portfolio’s rising value makes us more confident not only about the rally, but also about our own investment acumen, as we attribute our gains to our own brilliance.

Among some investors, the rising market may even trigger the so-called house-money effect. What’s that? Like casino gamblers who get lucky early in the evening, bull markets can make us feel like we’re ahead of the game, prompting us to trade more and take additional risk.

What do we buy? Often, we’re drawn to the familiar, such as our employer’s shares or companies whose products we use. Alternatively, we might flock to soaring stocks and funds that are in the news or that others are currently raving about.

Taken together, such investments may leave us with a badly diversified portfolio, and yet familiarity and popularity can make these stocks feel like a safe bet. Buoyed by the enthusiasm of others, we end up with a far more aggressive portfolio than we owned at the bull market’s inception—setting us up for hefty losses when stocks turn lower.

All fall down. As share prices slide, we shrug off the setback, ignoring negative news and the market’s rich valuations. Instead, we seek validation in the words of Wall Street’s bullish pundits, taking courage from their upbeat market assessment.

But then stocks’ losses deepen, the pundits grow more equivocal and our confidence ebbs away. Initially, we’d expected the decline to reverse. Now, we start extrapolating the losses, wondering how much worse things will get.

At the market’s peak, we would boast to others about our high tolerance for risk and our hefty allocation to stocks. But that bravado evaporates along with our portfolio’s gains, and now we wish we owned a far less aggressive portfolio.

Enter loss aversion—our tendency to get far more pain from losses than pleasure from gains. Stung by our portfolio's decline, some of us sell in a panic, because our investments are now underwater and we imagine things will get far worse. Alternatively, we might “double down” on our stocks, with an eye to speeding our portfolio’s recovery should the market rally.

But most of us simply sit tight. During the bull market, we took great pride in selling our winners, even if the result was hefty capital-gains taxes. But now that tax losses are readily available, we’re loath to take advantage, because we hate the idea of selling for less than we paid. Instead, we comfort ourselves by saying “they’re only paper losses.”

What about buying? Everything tells us not to: The news is relentlessly bad, the pundits declare that the bear-market bottom could be months away, and the market’s decline make further losses seem inevitable. Stocks may be on sale, our wise neighbor declares that this is a great opportunity and we might even agree—but buying simply seems too risky.

Check out the three earlier articles in this six-part series: Money Grows up,  Taking Center Stage and Mind Over Money.

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

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