Jonathan Clements's Blog, page 64

School Is In

IT’S BEEN AN UNUSUAL year—to say the least—for investment markets. After rising earlier in the year, U.S. stocks and bonds have dropped in recent weeks. Market leaders like Apple and Nvidia have been among the hardest hit. The U.S. dollar has also dropped, helping boost the value of international shares, and gold has continued to hit new all-time highs, despite inflation cooling.

What can we learn from all this? I see seven lessons.

1. There are no guarantees. After the November election, the expectation was that the second Trump administration would look a lot like the first, when tax cuts and other policies boosted share prices. With this as the consensus expectation, markets rose after the election and continued to rise into 2025’s early months.

But those expectations missed the mark. While tariff increases were expected, they’ve been much more significant—and thus more damaging—than anyone expected. And with the White House, Senate and House all aligned politically, the expectation was that Washington would move quickly to extend the tax cuts that are set to expire at the end of this year. Not only has that legislation moved slowly, but also there’s news that Republicans are considering raising rates on some taxpayers, imposing a new, higher bracket on those earning more than $1 million.

These policy shifts are a reminder that, even when everyone seems to agree, things can change. That’s why I believe it’s best never to go too far out on a limb with investment choices. Nothing is guaranteed.

2. Economics is not a science. The challenge with economics is that it’s only sometimes right. It’s more reliable than astrology, but it’s not chemistry or physics. In economics, sometimes things go according to the textbook, but sometimes they don’t.

Consider what we’ve seen this year. Owing to the trade war, the stock market has dropped. That makes sense. But the bond market’s reaction has run contrary to expectations. Usually, when investors become fearful, they seek out the safe haven of the bond market, and especially the security traditionally offered by U.S. Treasurys.

But that’s not what we’re seeing now. Treasury bond prices have dropped. And because interest rates are the flip side of bond prices, we’ve seen interest rates rise, making life more expensive for everyone from car buyers to home purchasers. That’s added to the environment of uncertainty and is definitely not what standard economics would have predicted.

3. Bad news isn’t the worst thing. Bad news definitely doesn’t help stock prices. But this year, we’ve seen something even worse: Uncertainty, it turns out, is often the worst thing for share prices. When it isn’t clear where the economy is headed, some investors will choose to sell and to sit on the sidelines until there’s resolution. That can lead to a prolonged period of malaise. By contrast, with bad news, the market tends to adjust and then move forward.

The flip side is that markets can rise quickly when clarity returns. We saw an example of that 10 days ago, when the White House announced that certain tariffs would be delayed by 90 days. The S&P 500 rose nearly 10% that day, its best day in more than 15 years. We’re still not out of the woods, though. Until there’s clarity, uncertainty will continue to be a day-to-day drag on markets.

4. The stock market is—ultimately—rational. Benjamin Graham, the father of investment analysis, explained the stock market’s seemingly irrational behavior with an analogy: In the short term, he said, the market is like a voting machine, but in the long term, it’s a weighing machine. Stock prices, in other words, often overreact in the short term, but as things settle down, they tend to more accurately reflect corporate profits, as they should. This idea seems particularly applicable right now.

Even if the new tariff policies put a dent in corporate profits, that damage is likely to be temporary. Over time, companies will find ways to adjust and to grow. That’s another reason it’s best to stay invested, despite the recent stream of bad news. If we believe that corporate profits will be higher five and 10 years from now, then that’s what matters, and that’s what should give us the confidence to look beyond today’s news.

5. Even policymakers don’t know where policy is headed. Last fall, after the election but before the inauguration, the incoming Treasury secretary, Scott Bessent, gave an interview and shared his thoughts on tariffs. Seeking to calm those worried about the potentially inflationary impact of tariffs, he offered some back-of-the-envelope math to illustrate why consumers shouldn’t worry. In his example, he assumed a 10% tariff rate. In reality, the administration is planning tariffs in excess of 100% on some countries, especially China. As investors, it’s helpful to monitor developments, but we should never put too much stock in the opinions even of policymakers.

6. The Fed’s control is more limited than it may seem. The Federal Reserve is a bit of an opaque institution. I’ll never forget the cab driver who spent the entire ride sharing with me his favorite conspiracy theories about the Fed. In simple terms, though, one of the Fed’s key roles is to set short-term interest rates. When the economy is flagging, it lowers rates to encourage economic activity, and when things are running too hot and inflation rises, the Fed lifts rates to cool things down.

But as we’ve seen this year, even the Fed’s ability to control rates is limited. While inflation has been coming down and the Fed has lowered short-term rates in recent months, bond yields have risen over the past few weeks. That’s a result of the uncertainty described above.

Each time the Fed’s Open Market Committee meets, it issues a statement that includes committee members’ expectations for future rate changes. Recent events, though, remind us that even when officials know which way policy is headed, it still may not have the intended result. This year, in fact, the market has gone in precisely the opposite direction.

7. Stock-picking is difficult but may be even more difficult at times like this. A recent MarketWatch article argued that, “It is a good time to be a stock picker right now.” Proponents of active management like to make this argument during periods of market volatility, when it seems easier to separate winners from losers.

But recent events don’t support this argument. Consider the news that authorities in Beijing have opened an investigation into American manufacturing firm DuPont. Its shares dropped 16% in one day. This is hardly an isolated case. Stock prices continue to be knocked around by the news of the day.

Even the most sophisticated investors are having a hard time. As The Wall Street Journal described recently, Wall Street pros have been just as whipsawed by recent events as everyone else. One hedge fund manager described waking up every 15 or 20 minutes during the night to check the news. Some might see this as a stock-picker’s market. To me, it’s a picture-perfect example of why index funds are a better bet.

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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Ask Me a Tough One by Jonathan Clements

I’m not expecting readers to answer all eight of the thorny questions listed below. But I’d love to hear your thoughts on one or two.

What in your past or about your personality explains your investment risk tolerance?
What uses of money—giving it away, saving it, specific purchases—bring you the greatest joy?
Would you be okay financially if U.S. stocks had a 0% total return over the next 10 years?
If you’re still working, what would it take for you to leave the workforce with a sense of satisfaction? If you’re already retired, did you leave the workforce feeling like you’d been a success?
What would you consider enough money, or will you always want more?
What would give your retirement a sense of purpose, or will you be happy simply to meander through each day? If you’re already retired, what’s been the biggest contributor to your happiness?
Who will look after you when you can’t, how will you pay for your care, and is there a risk that the cost will deplete your savings?
Will your heirs be happy with the estate you leave behind—not just its value, but also the ease of settling your affairs and dealing with your possessions?

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Fishing for Feedback

I met with a Vice President of Fisher Investments, a very large and very well-advertised fee-only investment advisory firm, to see if they would be a good fit to manage my portfolio. It turns out they weren't, and after they asked why, this was my reply:

Frank,

Thanks for taking the time to meet with me to explain how Fisher Investments works.

I respect you for asking for feedback. And since you asked:

1. I'm not a fan of the fee structure:

-Its size: Paying you $70,000 a year to manage my portfolio seems like an awful lot of money. I realize that it is based on incentivizing you to grow my portfolio. While I understand the idea that you will provide such superior returns as to make it appear insignificant, I still can't wrap my mind around paying you more money than the average US worker is paid ($66,622). I don't think of myself as a Communist, but there must be some upper bounds.

-Its calculation: The straight percentage of assets under management model seems arbitrary. When I use a CPA to file my taxes, he doesn't base his fees on my wealth, and neither does my maid or my Realtor®. Well, maybe not the latter, but I'm not sure you want to be placed in the same category as my Realtor®.

I do understand the 1%+ fee is industry standard, though it reminds me of my Realtor®, as she gets paid a percentage that has somehow become the norm and gets paid it irrespective of performance.

2. I'd rather not own (more) individual stocks:

-The tax headache: You mentioned that you will invest my money in individual stocks. After almost 30 years of owning individual stocks, I don't want more stocks, I want less. Transposing my 1099-B data into TurboTax is as complicated as it is insufferable. For example:

I have just finished filing my 2024 taxes, and they were greatly complicated by sales of a few shares of Solventum (SOLV), which was spun off from MMM on April 1, 2024. I purchased the shares of MMM so long ago that it occurred in another century, but Charles Schwab has classified part of the sale as Short Term (Box B) and part as Long Term (Box D). Why? I have no idea and don't have the energy to fight it. It's not the first time they screwed this up and they're not the only one.

- In 2023, Charles Schwab purchased TD Ameritrade and decided to change my account over on October 1, 2023. I think they chose this date specifically so I would now have two 1099-DIV, INC, and Bs to file. They could have changed over on, say . . . Jan 01, 2024, but I have a feeling they didn't because they cared more about their fiscal year issues than my carpal tunnel issues. Oh yeah, since I know you like to move your clients' accounts over to Schwab, can you ask that they start estimating my "Est. Annual Income($)" accurately by including dividends from my mutual funds? I spent most of the first part of 2024 getting them to include income from my CDs (<1 year), CEFs, JWN, and MAR, but I guess they don't want to make the estimate too accurate.

3. The resulting proxies: I know that I don’t need to vote each and every one received, but if I don’t, I feel like I’m letting someone down - I just can’t help myself.

4. The Performance: I read Ken Fisher's column in Forbes for many years and know that he always measured himself vs. the MSCI World index. While through Dec 31, 2024, his 10-year return (10.9%) certainly beats the  MSCI World (9.9%), it pales in comparison to the S&P 500 (13.14%). Please don't take it personally, as it's an issue I faced, and after the chronic underperformance of my portfolio, I decided to measure it against the S&P 500 Value Index (7.4%).

Thanks again,

Mike

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Screw politics, let’s talk health! Are all surgeries necessary or have we become the college tuition bank for the Doc’s children?

I’ve recently observed cases where family and friends undertake serious medical interventions with not the best outcomes. These interventions seem well intentioned to rehab issues, but I now wonder if they sometimes are a money grab when potentially better health outcomes might exist. In fairness to the Doctors, we want instant and complete resolution to sometimes niggling health issues – many caused by our own lifestyles or basic aging.

Here are a few observations:

My uncle had his prostate removed in his late 70’s, and successive complications from the surgery killed him after two years of miserable, bed-ridden life. The typical life expectancy for most prostate cancers is 10-15 years. In fact, some European health organizations eliminate prostate cancer screening after age 70 since studies show no longevity increase with surgical intervention.
Another relative in her 70’s had major back surgery to cure mild back pain, which persists perhaps worse than before. This individual is sedentary and does not exercise, walk or stretch. No exercise or physical therapy regimes were recommended prior to surgery.
A friend had a hip replacement in his 50’s to sustain his active sporting lifestyle. Eight years later, he has significant bone-loss damage and other chemical imbalance issues from metallosis poisoning. His prognosis is potentially continued deterioration of these systems.
Three different acquaintances (60’s) had knee replacements that have not gone ideally – all are hobbling worse and a couple have had multiple surgeries. Two are overweight, and one of these two is relatively inactive. No weight loss or exercise regimes were progressed prior to surgery.

The American medical model seems to be to undertake every possible intervention. In the case of optional surgeries in particular, I just wonder if we sometimes are a defacto 529 Plan for the Doc’s children rather than getting the best outcome.

Do you have further examples where the medical process was not ideally implemented or downsides were not fully explained, or alternatively, do you feel I have it wrong with these examples? The more examples, the better - many of us will face sitting across from our medical professional and wondering whether we should proceed down an uncertain path.

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Now it’s over, taxes are filed, but I have a question. How did prepare your your taxes?

For many, perhaps most of us, taxes are pretty simple, especially with the higher standard deduction.

So, did you prepare your own taxes, use a free tax preparation service, an accountant or fee base tax preparer?

Did you directly download 1099s for investments from your record keeper as opposed to manual entry?

Why did you make the choice you did? We’re you satisfied with results?

I have used TurboTax for several years. It works for me, but certainly there are many reasons to use other methods 

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An easy way to file a tax return extension due today

One option per the IRS -

Pay online and click on extension. Taxpayers simply pay what they owe using an online payment option, then click on extension as the reason for the payment. The taxpayer will receive a confirmation number of their extension for their records. There’s no need to file any additional forms.

https://www.irs.gov/payments

The failure to pay penalty is 0.5% per month. The failure to file penalty is 5.0% per month. Both are typically capped at a maximum of 25%. Just a word to the wise.

If you owe big bucks pay as much as you can now with your extension to help keep interest and penalty as small as possible. If you overpay you can choose to apply all or part of your over payment to your 2025 taxes when you file your 2024 return.

As of 12/31/2024 you can not longer purchase electronic I-Bonds with your federal tax over payment.

Most tax preparers will take this April 16 off. If you will use a preparer they will appreciate you not waiting until near the 10/15/2025 extended due date, for individuals, to get your preparer your tax information and electronically file your return(s).

Help your preparer, and yourself, by completing any tax organizer they provide. There are certain questions the IRS mandates the preparer ask you like do you have any digital assets or foreign accounts in 2024?

To avoid headaches please verify your bank routing number, account number and type of account if you will have any over payment direct deposited or if you are are having any balance due drafted.

If possible, provide your data to your preparer in the format they prefer. When I review a return for a colleague I type any notes or comments as I have lousy penmanship. I suggest you do the same if your hand writing is hard to read. Most prepares prefer that you skip staples for anything on paper. Please skip post it notes, it just jams the scanner or copier.

If your preparer wants their engagement letter signed my experience is that will likely be required for the preparer to do your work.

Hey Rick, any comment about availability of volunteer tax services after April 15?

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SCOTUS AND THE ODD COUPLE

At a time when American society has become increasingly polarized, I can’t think of a more propitious time to look at an example of how respect, civility and friendship  can flourish and overcome dissenting factious opinions.

There is no finer example of this than the friendship that existed between former Supreme Court Justices Antonin Scalia and Ruth Bader Ginsburg,  who eventually became to represent two branches of the Supreme Court.  Affectionately known as R.B.G by her supporters, Ginsburg was known to have anchored the liberals.  Scalia, “The Lion of the Law” led the conservatives.

These two became the best of friends based on their devotion to the Constitution; although built on different interpretations—bonding over a shared love of opera, love of country,  good food and wine, and their childhoods in New York.

This  enduring friendship helped them form a mutual respect that extended far beyond the courtroom.  Their families became friends too—the soft spoken but powerful Ginsburg—and the gregarious, witty  Scalia.  In remembrance of these two titans of the law, it might inspire  us to Look at this remarkable and yes, cordial, relationship.

Ginsburg’s most famous quote is  “Fight for the things that are important to you, but do it in a way that will lead others to follow you.” Scalia  is noted for remarking, “Call us the odd couple.  She’s a very nice person. What’s not to like? Except for her views on the law.”

Because they were ideological opposites, their relationship was considered improbable.  They didn’t compromise those beliefs for each other,  but they didn’t let it cause animosity or disrupt their friendship.

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IRS: All of Tennessee qualifies for disaster tax relief

From IR-2025-47, April 14, 2025

The Internal Revenue Service announced today tax relief for individuals and businesses in the entire state of Tennessee affected by severe storms, straight-line winds, tornadoes and flooding that began on April 2, 2025.

These taxpayers now have until Nov. 3, 2025, to file various federal individual and business tax returns and make tax payments.

The full announcement IR-205-47 at the following link -

https://mail.google.com/mail/u/0/?pli...

Imagine having worked long hours for months on end. The next day is April 15, the tax due date without extension. You glance at your news feed and the government has just extended the due date for both filing and paying taxes for over six months for all 95 counties in Tennessee. This accommodation is not just for the areas and people who have been subject to a true life changing disaster but for everyone in your state.

Then your phones start ringing off the hook. Clients want to know have you already hit the send button to file their electronic extension and to have their tax payment drafted or want to know if we mailed their check they brought us last week to pay their 2024 federal tax and/or first quarter 2025 estimated tax payment.

There are days and then there are days. Today was one of those days Tennessee tax preparers may laugh about in the future, just not today or tomorrow. I would encourage our elected federal officials to change the due date for filing individual returns to the following October 15 every year and just get rid of extension requirements. This is not new thinking as many states already have this procedure in place. The federal government can just charge interest and/or late payment penalty exactly as they already do and eliminate a lot of stress and needless work on both the IRS and preparers by having a more reasonable due date.

What are your thoughts on how we may do better as we work for a more perfect union?

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Trying To Think Through the Bond Situation

I’ve mentioned my dumb luck at having most of our money in cash, earning about 4% as of 4/1. My strategy is to dollar cost average back into the market between now and the end of the year. If you ask my reasoning on this, I’d just say that I don’t want to be late to the party that follows the end of trade war. I have begun the process with my IRA, and will soon start on Chris’s.

My quandary has to do with our bond allocation. Thinking that the Federal Reserve would soon lower rates to stave off a possible recession I was considering fully investing the bond allocation at this time. It now seems that a wrench has been thrown into my plan. With other countries now demanding higher interest rates on U.S. debt due to the trade war, I’m not so sure of myself any longer.

Anyone want to jump in and help me think this through?

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Car talk- Quinn likes friendliness

What do you look for when buying a car? Quality, reliability, safety features, good mileage? Yup all that plus I like technology and friendliness.

My new car has more cameras than Kodak. When I use the navigation it shows a live image of the turn so it’s hard to miss. It uses the cameras to find a space and park itself. If I get lost I just say, “Take me home.”

When I start the car it says, “ Hello Richard Quinn” That’s friendly. When I turn it off it says, “ Don’t forget your phone.” 

When I started the car on Thursday April 10th, the screen showed the Masters Logo, an image of me in a green shirt and a golf ball. On Saint Patrick’s day there were shamrocks falling down the screen. I can’t wait for the Easter Bunny.

Making adjustments are done by voice command. Say, “I’m hot” and she will say okay I’ll lowered the temperature - and it knows if you are the driver or passenger. The other day I put the defroster on by mistake and it got really hot so I said, “I’m hot.” The car responded, “Me, too it’s really warm in here.” and turned off the defroster. 

Concerned about tire pressure? Just ask. “Right front 41, right rear 40, etc.” How much gas do I have? “You can drive 264 miles.”

When Connie asks for something, she then says “thank you” The car replies differently each time. “You’re welcome or “My pleasure, have a nice day.” etc. The manual says the car is always learning new words. It makes me wonder who has the AI, me or the car. 

If I wander near the white line, the car steers me back to center. Scared the heck out of me the first time. 

At night, we are bathed in ambient light in a color of our choice, just ask. 

I’m still learning all that it does and how, I guess I should actually read the full manual, but that is unlikely. 

What does all this friendliness get you? More things to go wrong, higher repair costs and higher insurance premiums. It certainly isn’t necessary to go from A to B. 

Truth be told, all, this stuff is like driving an iPad and a bit distracting at times. It’s like having eyes on every side of your head. I like it though, it’s fascinating. It’s cool. What will be possible in the future? And I thought robotic prostate surgery was neat. 

My first car was a new 1962 VW Bug. It didn’t have AC or a heater or power anything and it cost $1,895. I competed in road rallies and drove it across the Country. Those were the good old days- but it never said a word. 

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