Jonathan Clements's Blog, page 62

Pick Your Peril

MANAGING MONEY IS about managing risk. But which risks? We all have a different collection of financial worries, and that drives the investments we buy and the insurance we purchase.

Problem is, every choice we make comes with a tradeoff. If we seek to fend off one risk, we often open ourselves up to other dangers. Consider five such tradeoffs:

1. Dying young vs. living long. When should we claim Social Security? Should we use part of our retirement nest egg to purchase an immediate annuity that pays lifetime income? If we’re eligible for a pension, should we opt for a lump sum or regular monthly payments?

These three questions all deserve careful analysis. But often, we answer based on worry: Are we most fearful of dying young, or is our big concern that we’ll outlive our money?

2. Enjoying today vs. prepping for the future. HumbleDollar readers tend to be masters of delayed gratification. That’s how many of us managed to amass enough—and often far more than enough—for retirement.

Once retired, we then strive to make the transition from diligent savers to happy spenders, and so we should. After all, that’s why we saved all that money. But from perusing comments on HumbleDollar, I’ve noticed that some take this a step further: They aim to really ramp up spending in their 60s because they figure that, later in retirement, they’ll spend far less and they won’t enjoy their money nearly as much—assuming they even live that long.

As I’ve mentioned before, I’m not sure this excessive spending is wise, in part because folks could face hefty long-term-care costs down the road. What’s driving the “spend heavily in our 60s” mentality? We might view it as a variation on point No. 1. Is our big fear dying young, without fully enjoying our money, or is it being prepared for the future, when that money might come in handy?

3. Getting rich vs. avoiding poverty. We all have both desires, but in varying degrees. One way to straddle these two is with the classic balanced portfolio, with its mix of 60% stocks and 40% bonds. Those who care more about avoiding poverty will likely opt for more bonds, while those whose greatest concern is getting rich might tilt more heavily toward stocks.

For some folks, these dueling impulses can translate into an odd use of their discretionary dollars. Think of the unsophisticated investors who keep almost everything in savings bonds and FDIC-insured bank accounts, but also spend money on penny stocks, lottery tickets, meme stocks and an occasional visit to the casino. The cash investments help them feel safe, while the longshot bets allow them to dream of riches.

Wall Street, and especially insurance companies, cook up products that aim to appeal to these twin impulses with a single investment. That’s how we end up with things like equity-indexed annuities, where investors can capture part of the stock market’s upside while being protected against losses. It’s a bad product, but a great marketing gimmick.

4. Simplicity vs. diversification. It’s possible to build a globally diversified portfolio of stocks and bonds with just two or three mutual funds or exchange-traded funds, thus combining simplicity with the safety offered by broad diversification. But what if we’re talking about a different sort of simplicity—limiting ourselves to just one or two financial firms, so we keep our finances simple for our own sake and that of our heirs?

I’ve never worried about diversifying across financial firms. I have almost all my money at Vanguard Group, and I use just one bank. But is this wise? For instance, in an era when financial firms are constantly under cyberattack, could thieves drain a financial firm of billions of client dollars, bringing the firm to its knees and leaving customers penniless? I have no clue whether this is a real risk or not, but I know it’s a major worry for others.

Countless times, I’ve also heard folks say they’d never buy an immediate annuity because of the risk that the insurance company involved might fail. Over the years, some small insurers have indeed gone bust. But what about major life insurers like New York Life, Northwestern Mutual and Mass Mutual? I find it hard to imagine one of these firms could fail—but others clearly can.

The concern over betting too much on one institution even extends to the federal government. Today, there are plenty of folks who fear Social Security benefits will be cut, especially once the Social Security trust fund runs dry in a decade or so. Again, this isn’t a fear of mine, but it’s a concern of many, and it’s one reason they claim benefits at age 62, the earliest possible age.

5. Insuring this vs. protecting that. By my count, there are eight major types of insurance: health, life, disability, long-term care, auto, home, renter’s and umbrella liability. Buy blanket coverage, and we might find we have precious few dollars left over for retirement savings and other goals.

To a degree, logic and necessity will guide our choices. Parents with young families should likely have ample life insurance, car owners are typically required to have an auto policy, mortgage lenders insist borrowers have homeowner’s insurance, and arguably everybody should have health coverage.

Still, that leaves a fair amount of leeway—and worry will likely dictate the choices we make. Those who worry about their health will often favor policies with low copays, low out-of-pocket maximums and fewer restrictions on the medical providers they use. Meanwhile, those who are risk takers might favor coverage with high deductibles, while skipping some policies they deem unnecessary.

We all have an image of ourselves, and about how conservative or aggressive we are. But action speaks louder than words. Take a look at your mix of investments and your collection of insurance policies. What does your financial life say about your worries?

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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At the End

AFTER WATCHING MY wife bake a loaf of wheat bread, I thought I’d try making my mother’s cornbread. Luckily, I kept her recipe, along with those for some of her other delicious dishes.

My mother’s recipes can bring back cherished memories—like the time I visited my parents when they still had their dog. Brandy would always greet me when I walked in the front door. She’d jump up and down knowing I would give her a treat. Not this time. I found her in the kitchen, sitting in front of the oven, waiting patiently for my mother to take out the cornbread. Brandy loved it as much as I did.

My mother never attended college, but she was sharp as a tack and had good common sense. I’d still seek her advice when she was in her 90s.

I remember when a contractor gave me a quote for some work I wanted done on my condo. She advised me not to accept the first offer. “The initial quote is going to be high because they’re expecting you to make a counteroffer,” she warned me.

When I was her caregiver, I would tell my friends that I sometimes thought she was watching over me, instead of me watching over her.

The tough part about being a caregiver for a senior is you’re responsible for someone who’s at a stage in life that's inherently difficult. The days leading up to my mother’s death caught me flat-footed. I wish I’d been better prepared.

My parents never had a letter of last instruction. But my dad told me about their investments, so I knew about their finances. I also knew they had a cemetery plot big enough for both of them. They bought it in 1995 for $10,245. But they asked me to try to sell it because they decided they wanted to be cremated.

Pacific View Memorial Park wouldn’t buy it back, though an employee told me the plot was now worth about $30,000. Unfortunately, it was early 2009 and the economy was in bad shape. There wasn't a market for burial plots. We decided to keep it and put my parents’ ashes there.

During my father’s long battle with lymphoma cancer, one of our biggest concerns was making sure the cost of his care didn’t deplete my parents’ savings to the point where it would jeopardize my mother’s financial security. As a result, we never used a caregiving service.

When my father started hospice care in 2012, my sister, brother-in-law and I took turns helping my mother care for him. We kept his bed in the living room where he’d be close to us. My brother-in-law or I would sleep on the couch, so there was always someone with him.

Hospice provided everything we needed, including a bed and morphine for pain. They also sent someone periodically to bathe and shave my dad, and even brush his teeth. A nurse would occasionally show up to check his vital signs and make sure we had everything we needed to keep him as comfortable as possible.

This around-the-clock care lasted for three months. Since my father was a veteran of World War II, the federal government provided a marker for his grave. We cremated his body and placed it in their cemetery plot.

In October 2019, my 96-year-old mother had a serious heart attack. The doctor told me there wasn’t much that could be done for her. I was advised to prepare her for hospice care. My sister and I decided it would be best if my mother didn’t know her life was coming to an end. She had seen what my father went through and it weighed heavily on her. We knew she was afraid that she might suffer like my father did.

I made arrangements for a caregiving service. At the time, the hourly rate was $27 an hour. My mother's savings consisted of $325,000 in highly liquid assets.

The hospital discharged her and sent my mom to a rehabilitation facility that I’d picked out. I waited for her to arrive by ambulance. I couldn’t believe how talkative and energetic she was when she arrived. She talked about going home tomorrow, and moved her legs back and forth in bed. She wasn’t the same person in the hospital, where she’d been quiet and listless.

It was too good to be true. My mother only lived nine more hours. She died peacefully in her sleep. I’ve been told when people are nearing death, they sometimes get this last burst of energy before they pass away. That’s what my mother must have experienced.

When I received the bad news about my mother’s death, it was 1:30 a.m. The head nurse told me I had only a few hours to remove her body. It was the state law.

I wasn’t prepared for this. I hadn’t made the necessary arrangements. I guess I was in denial. I called Pacific View, where my parents had their burial plot. Luckily, they had someone on call 24 hours a day.

I drove to the rehab facility, so I could be there before they took her away. There was a sheet draped over her. I rubbed her hair that was sticking out. Then the nurse helped me take off her wedding ring, which I gave to my sister.

After my father’s death, I wished I had asked my mother this question: Do you want to know when your time is coming to an end? I often thought I should have told my mother that the end was near. Maybe she had a last-minute request or would have confided in me about something that was on her mind. I sometimes think I denied her the opportunity to end her life on her own terms.

My sister said, “We were just trying to protect her.”

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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No Hot Dogs

WHEN I WAS 24 YEARS old, I took a weekend trip to Reno, Nevada. My hostess for the visit wanted to go to a casino. I had no interest in gambling. But not wanting to be impolite, I agreed to go with her.

I was making $16,000 a year back then. I decided I could afford to lose $20. I got two rolls of quarters and sat down at a slot machine. As I was getting close to losing the last of my coins, the machine lit up and a siren on top of it began blaring. I soon discovered I was the lucky winner of $1,400.

Getting an unexpected windfall equivalent to roughly one month’s salary was quite a thrill. I spent three weeks thinking of the various ways I could spend my fortune. I don’t remember all of the items I ended up purchasing, but each was the result of many hours of contemplation.

Thirty years later, I ended up with another unexpected windfall. In 2022, I sold my home for $125,000 over the asking price. The net result was a windfall roughly 100 times the size of my first.

This time it took me two years to decide how to spend my fortune. Every idea my husband and I had for the money was contemplated—and rejected—multiple times. We considered leasing a small retail building and starting a dog training business. We thought about purchasing a small plot of land somewhere so we could escape the Phoenix summer heat. We came close to purchasing a used motorhome so we could haul our dogs around in climate-controlled comfort.

Ultimately, we settled upon a solution that combined a bit of all of our previous ideas. In May 2024, we purchased a cargo van and had it converted into a custom dog transport vehicle.

Our four dogs now ride safely in individual crates in the rear of the van. A rooftop air-conditioning unit and ventilation fan mean they’ll always stay comfortable in the heat. There’s plenty of room to store all of our dog training equipment inside the van. Road trips are simple affairs now. When the heat at home gets to be too much for us, we load the dogs up and head out. Within a three-hour drive, we can be up in the mountains, where the temperatures are typically 20 to 30 degrees cooler.

It wasn’t easy to spend my second windfall. I’ve always been a saver. My natural inclination was to hold onto the money and save it for a rainy day. But rainy days are few and far between in Phoenix.

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Price of Playing

WE RECEIVED A PHOTO Christmas card from a guy I used to work with. The picture was taken at his daughter’s wedding, with my old colleague standing next to his wife, son and daughter-in-law. Picture perfect.

The only problem: His story isn’t picture perfect. When he and I first met, we worked in the same division at an insurance company. Right before the division was closed down, I transferred to a different department. Eventually, we were both laid off. I went in one direction. He chose a completely different direction, becoming a life-insurance salesman.

After our division was closed down, rumors started circulating that he had cheated on his wife. This shocked me because this guy looked like a boy scout. In fact, he had been an Eagle Scout. Such people are supposed to be trustworthy, loyal and kind. I’d put him on a pedestal.

When I approached women who had worked in the same division as this guy and asked about his infidelity, they all said, “Oh yeah, that doesn’t surprise me.”

Learning all this, my attitude toward my old colleague changed. It isn’t that I’d never heard of anyone cheating on his wife. Rather, it was because I’d held him in such high regard. Other mutual friends also ended their relationship with this guy.

His wife, however, never left him. She was pregnant with the daughter who’d later be the Christmas card bride. When the guy’s wife was challenged by mutual friends, she said she couldn’t leave because she wasn’t working and needed his support to raise their two kids. Result? The Christmas card I found myself looking at.

My wife worked with a colleague who used to joke that, “It’s cheaper to keep her.” In my ex-colleague’s case, it was his wife who decided she couldn’t afford not to keep him. Anyone who’s gone through a divorce will tell you it’s almost always a costly proposition, especially if it’s a nasty divorce.

How costly? For Amazon founder Jeff Bezos, the price tag was $38 billion. His wife, MacKenzie, met Bezos at hedge fund D.E. Shaw. They left to start Amazon together. He cheated on her, they divorced and she ended up receiving $38 billion.

When my first marriage ended, it wasn’t due to cheating. It was because I didn’t want kids. This didn’t sit well with my first wife, who came from a large Irish Catholic family. She got the marriage annulled. I didn’t contest the divorce. She paid for the whole thing since she was the one who wanted out.

We all make mistakes. We’re all human. Have you considered the consequences of your actions? If the action is worth the price you might pay, go for it. If not, maybe—as with all financial decisions—it’s worth stopping to ask, “Should I do this or not?”

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Bet on Low Costs

MORGAN HOUSEL, author of The Psychology of Money, once made this observation: “Before the 1700s, the richest members of society had among the shortest lives—meaningfully below that of the overall population.”

It was counterintuitive, but Housel cited a hypothesis, developed by historian T.H. Hollingsworth, to make sense of it: “The best explanation is that the rich were the only ones who could afford all the quack medicines and sham doctors who peddled hope but increased your odds of being poisoned.”

Housel then added this thought: “I would bet good money the same happens today with investing advice.” Wealthy folks, in other words, are lured into "fancy” investments like hedge funds that, in Housel’s view, don’t serve investors well.

The performance of hedge funds is perhaps best illustrated by a bet made in 2007 between Warren Buffett and a hedge fund manager named Ted Seides: Buffett bet that, over 10 years, a simple index fund tracking the S&P 500 could outperform any hedge fund or group of hedge funds. For his side of the bet, Seides chose five funds-of-funds. These are funds that invest in a diversified group of other funds.

The hedge funds ended up trailing in nine of the 10 years. Seides threw in the towel before the 10-year mark, writing that, “For all intents and purposes, the bet is over.”

In his 2017 annual letter, Buffett summarized the results: Over the 10 years, the S&P 500 returned an average 8.5% a year. By contrast, the group of hedge funds returned just 3% annually.

These numbers pose a conundrum since many university endowments are perceived to have done well with hedge funds, private equity and other private fund vehicles. If they work for endowments, why don’t these same investments work for everyone else?

The late David Swensen, who for 36 years was the manager of Yale University’s endowment, provides the best explanation. When Swensen joined Yale in 1985, the endowment was invested traditionally—mostly in stocks and bonds. But over time, Swensen developed a new strategy, one that leaned heavily on hedge funds and other private vehicles. This new strategy delivered strong returns, and in 2000 Swensen wrote a book titled Pioneering Portfolio Management, which was a sort of cookbook for other fund managers who wanted to do the same thing.

A few years later, Swensen wrote a second book, titled Unconventional Success, with the goal of providing individual investors a formula for applying the ideas he’d developed at Yale. The project took an unexpected turn, though. As Swensen began looking at the numbers, he realized that the private fund strategy he’d developed for endowments wouldn’t work for individuals, for a number of reasons.

First is access. Owing to their partnership structure, hedge funds are limited to just 500 investors. Because of that cap, they have to be selective. It makes sense that, for those limited slots, they’d choose the investors who could write the largest checks. And while all funds face this same constraint, the funds that can be the most selective are the ones with the best performance. Result? As a rule, only funds with lower-tier performance are open to individual investors.

This problem is compounded by the fact that there’s a wide gap between the best and worst funds in the world of private investments. According to a study by consulting firm McKinsey, the difference between the best and worst among private funds is much greater than the difference among publicly available investments like mutual funds and exchange-traded funds (ETFs).

Fees are another issue. To appreciate the impact of private fund fees, we can compare the fees on a typical S&P 500 index fund to those imposed by the average hedge fund.

Vanguard Group’s S&P 500 fund charges a management fee of 0.03% a year and no performance fee. Over the 10-year period of the Buffett-Seides bet, what would an investor have paid to a hedge fund?

Private funds charge investors two separate fees, known as “2 and 20.” The first component is the management fee, which is usually 2% of assets under management. On top of that, most hedge funds collect 20% of the profits, known as the performance fee. During the 10-year period of the bet, the S&P 500 returned 8.5% a year, so the performance fee would have added another 1.7% (20% x 8.5%) to the annual cost, for a total of 3.7%. The hedge funds, in other words, would have charged 120 times more than the index fund (3.7% vs. 0.03%) to manage the same set of investments.

This was a key reason Buffett felt confident in betting against hedge funds. “Performance comes, performance goes. Fees never falter,” Buffett wrote. In reflecting on the results, Seides didn’t disagree on this point: “[Buffett] is correct that hedge-fund fees are high, and his reasoning is convincing. Fees matter in investing, no doubt about it,” Seides wrote.

Taxes are another key consideration with hedge funds. While they pursue diverse strategies, hedge funds are usually all trying to beat the market. As a result, what they have in common is that they trade frequently, and that almost always translates to tax-inefficiency.

Taxes generated by hedge funds also tend to be unpredictable, varying in relation to the fund’s trading results each year. For high-net-worth investors, who are most vulnerable to higher tax brackets, hedge funds tend to make tax planning an uphill battle.

If hedge funds weren’t a good fit for individual investors, what did David Swensen recommend? “Instead of pursuing ephemeral promises of market-beating strategies, individuals benefit from adopting the ironclad reality of market-mimicking portfolios….” In other words, index funds.

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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Living It Up

THIS HAS BEEN A YEAR of living large in the Kerr household.

I just finished adding up the numbers for 2024, and between my son’s wedding in Colorado in June, my own wedding in October, our honeymoon afterward, a vacation to Key West, a new car for my new wife, and various long-overdue repairs to Rachael’s townhouse, I spent upwards of $60,000 on items I hadn’t budgeted for in 2024.

The tally doesn’t include the $9,000 I spent on a hot tub for the mountain house. That purchase was financed by the last of my restricted stock grants that I took with me when I retired from my former employer three years ago.

Those are hefty expenses for a 65-year-old who is no longer employed full-time. All I can say is, thank goodness for my part-time gig as a writer for corporate executives. If I didn’t have that money coming in, I would have burned through most of my liquid cash and had to tap my retirement savings earlier than planned. As it stands, I was able to cover my financial splurges, while ending 2024 with roughly the same amount of cash as I started.

More to the point, if I didn’t have the work income, I wouldn’t have done all the things I did over the past year. Rachael and I would have had a much simpler and less expensive wedding. We would have put down less and financed more of the cost of her new car. We would have skipped the Key West trip and put off the house repairs a little longer.

But that’s why I continue to work part-time—to fund experiences and other discretionary items during the early part of my golden years, while I hold off drawing down my retirement savings. Those savings are sufficient (knock on wood) to provide a comfortable, albeit not cushy, income over the course of a 20- to 25-year retirement. I figure the longer I can delay tapping retirement savings, the longer they’ll last me in my later years.

The same is true for Social Security benefits. While I could begin drawing benefits now, I’d take a hefty haircut compared to what I could get if I wait until my full retirement age of 66 years and 10 months. On top of that, I’d have to pay higher taxes on my Social Security benefits because of my earned income, and I might lose much or all of my benefit to the Social Security earnings test. So, why not wait another year and a half and thereby avoid the haircut?

In the meantime, I’m acutely aware of time’s winged chariot at my back and I have no interest in postponing trips and experiences I’ve long wanted to do. As Jonathan’s recent cancer diagnosis has brought home to HumbleDollar readers, life is fragile and we best live it now.  

That’s what I’m doing with my current income. I could try to sock some of it away. But frankly, I’m done with the accumulation phase of my life. As long as I can maintain a healthy emergency fund in my money market account, I intend to spend every after-tax penny I make on trips, gifts and, yes, occasional luxuries. I’ve worked hard all my life. Why not enjoy it while I can?

Take our wedding celebration in mid-October. Yes, we could have made a trip to the courthouse and saved more than $15,000. But what an event it was. We had 90 relatives and friends from as far away as Hawaii and England. How often does that happen—other than at wakes and funerals?  

Likewise on getting a hot tub. I’ve always wanted one, and soaking in that tub for 20 minutes does wonders for my aching neck and joints.

Interestingly, retirement has taught me a few things about myself that I didn’t fully appreciate before. All my working life, I’ve avoided spending money on extravagances that others in my income bracket might have had no trouble with, such as going on expensive trips or shelling out tens of thousands of dollars for a country club membership.

I told myself I was being responsible, thrifty, frugal. How could I spend on extravagances when I had three kids to put through college and a retirement fund to build?

But you know what? I like the finer things in life as much as anyone else. To enjoy those luxuries, I just needed the psychological comfort of a solid financial cushion.

Now, I’m there and I’m opening the valve on my spending. I am, I hope, doing it responsibly. Only time will tell.

Author and blogger James Kerr is a former corporate public relations and investor relations officer who now runs his own agency, Boy Blue Communications. His debut book, “ The Long Walk Home : How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life’s Purpose,” was published in 2022 by Blydyn Square Books. Jim blogs at  PeaceableMan.com . Follow him on Twitter  @JamesBKerr  and check out his previous  articles .

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What I Always Wanted

IT'S THAT TIME OF year when people think about giving. For my wife, this is what she lives for. She loves buying presents. She’s a very giving person and puts a great deal of thought into the gifts she buys.

She’ll buy gifts all year round, even when the event—such as Christmas—is months away. Problem is, she frequently forgets where she’s stored the presents she’s bought. They’ll eventually be found, but in many cases long past the date when she wanted to give them. We took a trip to Alaska in 2021. One of the gifts I received last Christmas was from that trip. I laughed when I saw it.

She inherited this trait from her mother, who would also buy gifts far ahead of time, and then forget what she bought or where it was stored. It was a running joke that, around Christmas time, my mother-in-law would confess to forgetting where your gift was.

“It’s better to give than to receive.” That’s a noble sentiment. But what if you don’t want to receive? That’s been me for many years. It’s not that I don’t want more stuff. The problem is, I get stuff I don’t want or need.

For instance, I’m not a fashion plate. I don’t buy the latest styles. Instead, my clothes are the same style that I’ve been wearing for years. I own blue suits, white shirts, black shoes, blue jeans, T-shirts and solid-color sweatshirts. You get the idea.

For years, my wife has been trying to upgrade my wardrobe. She buys me clothes for Christmas or my birthday that she thinks I ought to wear. They sit unworn in the back of my closet or dresser drawers.

My wife’s sister and her daughters have the same need to buy presents. As a member of this family, I’m on the receiving end. Their gifts usually aren’t what I want or need. I politely say “thanks,” not meaning it, but rather for the sake of not causing a scene.

This all started when I was a kid. My brother and I would always receive gifts from Santa Claus. For some reason, he never got me what I wanted. When I got older and began working, I solved this problem by buying what I wanted.

This Ebenezer Scrooge attitude still lies within me. I don’t have a wish list of items I want others to buy for me. Because no list is offered, I get what people think I could use or want. Nine times out of 10, it isn’t.

When family members ask for my list, I say, “I really don’t want anything.” I thought this would reduce their anxiety. The opposite occurred. They rack their brains trying to figure out what I might want. They’re also mad that I don’t produce a list of all the things I’ve always wanted. What’s a guy to do?

Last Christmas, when I opened the presents from my wife and son, I was pleasantly surprised. Instead of getting things that my wife thinks I need, she bought me everyday items that I use, but I’ve run out of or soon will. It was a good Christmas.

One year, my sister-in-law presented me with a nicely wrapped box, telling me, “This is something you’ve always wanted.”

Who can resist that? Something I’ve always wanted. I can’t imagine what it is. Oh boy, oh boy.

It was a shoe-shine box. When did I say that was what I always wanted? My wife answered for my sister-in-law: “You said you wanted a place to shine your shoes.”

I replied, “What I wanted was the chair that has a coat hanger on the back, so I can put my suit jacket on the back, and then sit on the chair and polish my shoes before putting them on.”

My wife said, “Oh, you wanted a valet chair.”

That shoe shine box? I still use it. Every time I see it, I smile. I think back to that Christmas when I supposedly got what I always wanted.

David Gartland was born and raised on Long Island, New York, and has lived in central New Jersey since 1987. He earned a bachelor’s degree in math from the State University of New York at Cortland and holds various professional insurance designations. Dave’s property and casualty insurance career with different companies lasted 42 years. He’s been married 36 years, and has a son with special needs. Dave has identified three areas of interest that he focuses on to enjoy retirement: exploring, learning and accomplishing. Pursuing any one of these leads to contentment. Check out Dave's earlier articles.

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Getting Roasted

"YOU WILL ROTH!"

“But Dad, I’m only 10.”

“Evan, it is never too early to start saving. Besides, this gives you 70-plus years of compounding.”

“Yes, Dad, but didn’t you tell me last week that I need a job and earned income to contribute to a Roth?”

“We can arrange to get you a paycheck. I’ll get a friend or neighbor to hire you. What would you like to do?”

“I like to play soccer.”

“Evan, I meant what kind of job are you interested in? You know, engineers have among the best long-term employment prospects.”

“Dad, stop! Shouldn’t I be thinking about today’s soccer game?”

“The game is still an hour’s drive away, so we have lots more time to talk about starting your Roth account.”

“You already told my two teammates and me all about Roth accounts when you drove us to last week’s game. Remember, you held me in that headlock to make sure I was listening.”

“Okay, enough about Roths. Have you opened your health savings account yet?”

My 24-year-old son performed the above soliloquy at our family’s Thanksgiving dinner last year. The performance included animated theatrics to imitate me driving, lecturing seriously, and holding him in a headlock. The family was in hysterics.

Evan continued his tirade about my supposed transgression of providing too much parental guidance on financial issues. “You will become an engineer,” he declared. As he started to run low on material, my 29-year-old daughter, Megan, joined the fray.

“And remember, it’s not just about Roths, but also asset allocation. You should be 100% in stocks when you’re young,” she said, using a deeper voice to imitate me, while wagging her finger in a parental-like scolding manner.

“But Dad, I thought you always advised to first set aside six months of emergency expenses.”

“Megan, you’re only 15 and don’t have emergency expenses.”

“Yes, I do. I need more Taylor Swift merch.”

“Okay, but don’t lose sight of your tax rate in each investment bucket. Capital gains are only taxed at 15%, but your income-tax rate could jump to 24% or even 32% by the time you start RMDs,” she said, while pantomiming a bunch of buckets.

“Dad, aren’t I too young to worry about RMDs?”

“Megan, have I ever told you about the inheritance step-up in basis?”

I was roasted more than the turkey. They also left me no opening to rebut my alleged over-parenting. On the other hand, the fact that my Gen Z and millennial children could so ably parody their retired father with his own financial diatribe provided me with a deep-down feeling of “thanks-giving.”

In the end, the only response I could muster was to stay completely in-character: “I presume you all have made your annual Roth contributions and already captured much of this year’s strong stock-market bounce?”

They had not.

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Hardly Missed

I FEEL GRATITUDE for the life I've had. But that doesn't mean I don't have a few regrets: Friendships that turned sour or simply faded away. People who died before I got to see them one last time. Professional endeavors where I felt I could have done better. Purchases I made that didn’t live up to my expectations.

But my list of regrets has three glaring omissions.

First, it doesn’t include any of the investments I’ve made. This isn’t because all my investments have performed well. Far from it. As a globally diversified investor, my portfolio includes plenty of duds. But that’s the nature of diversification. You’re always going to own some of the world’s stinkers.

Perhaps I’d feel differently if I picked individual stocks or actively managed funds, rather than favoring index funds. But with index funds, owning everything comes with the territory, so I don’t feel badly when I suffer bad performance.

What’s the second area where I have no regrets? It’s the purchases I resisted making. In fact, while there are plenty of purchases that I wish I hadn’t made, there’s only one purchase that I failed to make which—in retrospect—I regret.

Why do some of my purchases show up on the regret meter, but almost none of the purchases I failed to make? No doubt it is, in large part, because it’s easier to recall the purchases I made. In many cases, those purchases are still with me, reminding me of my mistake—which is why I should probably throw or give these items away. That brings me to my third non-regret: I can’t think of a single possession that I’ve given away or thrown away that I’d like to have back.

From this, I draw two lessons: If I’m agonizing over whether to make a purchase, I should simply walk away, because it’s unlikely I’ll later regret my failure to buy. And if I make a purchase I regret, I shouldn’t have any qualms about unloading it.

What’s the lone purchase that I failed to make, but which I still regret? It was a painting by Victor Vignon, a minor 19th century French impressionist whose circle of acquaintances included Camille Pissarro and Paul Cezanne. The painting was on eBay and sold for around $2,000. My then-wife declared that she didn’t like it and that I shouldn’t buy it, but I still find myself occasionally musing about the painting.

No, this wasn’t the reason for our divorce.

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Misleading Indicators

BENJAMIN GRAHAM, the father of investment analysis, made this observation: “The investor’s chief problem—even his worst enemy—is likely to be himself.”

Why? One reason is our intuition can sometimes lead us astray. Things that seem like they make sense, and seem like they ought to be true, often turn out not to be supported by the data.

Perhaps the best-known example is the divergence between growth and value stocks. Intuition suggests that growth stocks—companies like Apple and Amazon—would deliver better performance than their more pedestrian peers on the value side of the market. But it turns out that value stocks, including banks, insurers and industrial companies, have delivered better returns, on average, than their more popular peers. This isn’t the case in every time period, but it’s been true over the long term.

An analogous dynamic applies at the country level. Regions that are growing quickly, as measured by GDP growth, seem like they ought to be good investments. But according to the data, the opposite is true. This has been known for some time, but was recently confirmed in a new study by Derek Horstmeyer, a finance professor at George Mason University.

Horstmeyer looked at 34 markets from around the world and examined the relationship between investment returns and GDP growth. What he found was that the relationship was nearly inverse: “Out of the top seven fastest-growing countries over the past 10 years, only one had a positive annual rate of return in the stock market.”

China, the fastest growing country in the group, with 6.8% average annual GDP growth, saw its stock market fall by about 0.1% a year. Other emerging-markets countries delivered similarly poor returns. Malaysia, Indonesia and the Philippines—all with GDP growth rates more than double that of the U.S.—had negative stock market returns over 10 years.

Meanwhile, some of the slowest-growing countries in the world delivered very reasonable, positive returns. This includes Italy, France, Germany and Japan—countries where GDP has grown at an anemic rate of under 2% a year, and even under 1% in some cases.

Overall, the fastest growing quartile of countries delivered average stock market returns of just 0.1% over the past 10 years, while the slowest-growing quartile delivered market returns of 3.4% a year—entirely contrary to intuition.

As an individual investor, what can we learn from these results? I see five lessons.

1. Exchange rates. A key feature of this study is that the investment returns were measured in dollar terms. This was intentional, to simulate the real-world results that a U.S.-based investor would have received. These market returns, however, differed—sometimes significantly—from the returns that an investor would have received in each country’s local currency.

Because of currency fluctuations, in other words, a given country’s stock market might deliver positive returns in that country’s currency but negative returns after being converted to dollars. This is one of the key risks when investing in international stocks. Of course, currency shifts can go in the other direction and benefit investors. But this is hard to predict. It’s because of this added element of uncertainty that I suggest limiting exposure to international stocks.

2. Stories. In the past, I’ve referenced the book Narrative Economics by Robert Shiller. Stories often drive markets. That’s because stories are entertaining, they’re easy to remember and they often sound like they make sense. But they can also be completely wrong. Thus, in making financial decisions, it’s important to rely more on data than intuition—and to be especially wary of storytellers.

3. Data. Even when the data seem clear, things may not turn out as expected. Consider this seemingly clear fact pattern: Today, the U.S. market is trading at 22 times expected earnings, while emerging-markets countries are trading at just 12. Combine that with faster population growth and rapid industrialization, and it seems like emerging markets should be delivering above-average market returns.

But they haven’t. Why? Data, even when it’s reliable, can’t predict the future. There are simply too many variables at play.

4. Institutions. A few weeks back, I discussed the work of this year’s Nobel Prize winners in economics. Their key finding: Political and economic institutions are the most important drivers of countries’ economic success. Even countries that are doing well are apt to stumble if their governments are too autocratic.

This has been the case most notably in China, where—despite strong economic growth—the regime’s heavy-handed policies have damaged investment returns. The lesson: When investing in international markets, be sure to assess whether a given government is playing by the rules we know and expect—or whether it’s playing by its own rules.

5. Diversification. While diversification might be the first rule in investing, there’s no rule dictating how diversification must be achieved. In building a stock portfolio, one school of thought is to mirror the global economy—an approach Jonathan advocated in his article yesterday. But if U.S. stocks account for 65% or so of global stock market value, should U.S. stocks really be just 65% of an investor’s stock portfolio? Yes, that’s one way to diversify, but it’s not the only way.

Indeed, Jack Bogle, founder of the Vanguard Group, saw no need to invest outside the U.S. With more than 4,000 public companies in the U.S., there’s a reasonable argument that this alone provides sufficient diversification. Meanwhile, others—myself included—believe there’s a benefit to having some international exposure, but only a modest amount. What’s most important to recognize is that no amount of math will yield the optimal answer. A balanced judgment is likely to provide as good an answer as any.

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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