Jonathan Clements's Blog, page 65

RCC asks – How will you know when it’s time?

A number of events over the past few months have me thinking about aging, mortality, legacy, frailty, and – of course – financial planning. These events included attending funerals, preparing tax returns (ours and dozens of others), visiting old friends and distant family, minor traffic accidents, winter doldrums, and the recent discussions on HumbleDollar on the unique estate planning needs of childless retirees. Recent market volatility may have played a small role.

My wife and I have a lot of real-world experience caring for aging and infirm parents, both physically and financially. Those experiences have seared in my mind the importance of a well-planned, well-documented, and well-communicated estate plan. Jonathan’s articles over the past year have been a great example of this.

A recent experience has me thinking about a very tricky and personal question in retirement. I have a good friend, a former colleague and mentor, who is in his late 70s, single, and childless. He lives in his home of 30 plus years, with a first-floor master bedroom, and relatively easy entry. He has his estate in very good order, has a deposit on a CCRC near family, and has communicated this with his family. He hopes he will have the ability to make the choice to move when the time comes.

It’s one thing to have a good estate plan in place. But if we haven’t communicated that plan, or are unwilling to execute it, it’s of little use.  I can’t count the number of stories I’ve heard of aging parents that are unwilling to explain their finances with their children, much less hand over control. Will we be willing to give up the literal keys to our independence – our cars? Has anyone thought about, or put criteria into place, to help make good decisions about your future? Have you communicated that to the important people in your life?

I took a pretty serious tumble about a year ago. The injuries were mostly bruises, scrapes, and cuts.  I don’t think the fall caused any cognitive issues, at least not any more than the 2 pints of Guinness that preceded it. But it could have been much worse, and it reminds me that things can change in an instant. So, I ask my HD friends – how will you know when it’s time? More importantly, will you be willing to execute the plan?

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Ida M Fuller, Social Security, EVs, taxes and a 340 million person society-Quinn rambles on, but with a purpose

The first Social Security retirement check was issued to Ida M. Fuller on January 31, 1940, for an amount of $22.54. She had paid SS taxes a little less than three years. She died Jan 27, 1975 at 100 years old. It’s a pretty good bet she didn’t pay for her own benefit.

But that is not the point. The point is Social Security has worked quite well paying benefits for 85 years. The is no justification to attack it. There is no reason to screw it up now.

The SSA, estimates that about half of the population aged 65 or older live in households that receive at least 50 percent of their family income from Social Security benefits and about 25 percent of aged households rely on Social Security benefits for at least 90 percent of their family income.”

All the rhetoric about its future, it being a scam, a Ponzi scheme, I could do better investing the taxes myself, the money was stolen, I paid for my benefits is noise, nonsense. 

Tens of millions of retirees, surviving spouse, ex-spouses, dependent children and disabled adults and children depend on the program.  

Social Security is essential to the economic and social wellbeing of the United States.

A form of SS is not unique to the US. Well over 100 countries have similar programs. Many pay higher benefits replacing more than 40% or so of pre-retirement income on average. In many cases worker taxes to fund their program are higher than in the US. 

For reasons unknown to me, many Americans can’t make the connection between paying taxes and the services and programs we want and need. There are those of us who don’t use some programs so don’t see the need to pay taxes. Seniors against property taxes comes to mind.

To illustrate sharing costs, New Jersey now charges owners of electric vehicles and extra $250 when they register their vehicle each year. Why? Because they don’t pay the gasoline tax that funds road maintenance. I bet there are EV owners who see that as unfair. 

This is a society of 340 million very different people, people with varied abilities and needs. There are winners and losers, doers and takers, and that will never change. But it would be nice to think we are also a functioning, caring society. 

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Lesson Four From Taking Care of a 102 yo in Her Last Year of Life- The Final Hours of Life Can be Beautiful

Unfortunately I have had a lot of experience in this realm. In an 18 month period during 2017-18. I first lost my twin brother at 59 years old; then almost 1 year later my father, and six months after that my mother each on one side or another of 85. Unfortunately all of them suffered from some type of dementia. As a result at the time of their passing we were unable to communicate with them. With my brother I remember sitting at his bedside thinking, can he hear us, does he know what’s happening (unlikely), or ie suffering?Another type of suffering can occur when one of the surviving siblings can make the final hours intolerable due to their behavior. I was not present at the final passing of my mother. The evening of her passing I could no longer tolerate the tension, broke down and told my wife,”I can’t go through this again”, and we left thinking that we would get a call if time was getting short, as my father’s passing took days. At 2 am the following morning I received a call from that family member that she had died. When I asked what happened the family member, “she was dying!”

Fast forward to this March and my mother in law was declining rapidly. Luckily the day before she passed despite being over 103 years old she was able to communicate with us and when we left around dinner time she thanked my wife and I for caring for her in her final decade including welcoming her into our home for the final year. It was definitely her saying goodbye. The night before her passing I could not sleep and after a half hour in bed I decided to head to the hospital to be with her, arriving just after midnight. When her condition would change I was able to immediately notify the nurses who would make her comfortable. The atmosphere was totally different from that of my family members’ last hours as it was very peaceful. My wife and daughter arrived in the early morning we reminisced, laughed, and cried. Less than three hours later her passing was dignified and peaceful, just what I had longed for with my family members.

Unfortunately, or fortunately I went through another dignified and peaceful passing of my uncle four days later with my aunt and two cousins and spouses.

My plea to HD readers is when you are I such a situation at the end of the life of a loved one please take into account that there are others around, that the process of watching a loved one pass is different for each individual, and try to make the event respectful and peaceful for all those involved.

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Change is good – and profitable

For more years than I remember I have saved my pocket change. Every day I put it in a tray on my dresser. When it overflows, Connie bags it and eventually rolls it for deposit. That happens at around $80.00.

I never pass a penny on the ground. In fact, on occasion I dig one out of the soft tar. Some coins are so mangled it’s hard to tell what they are at first. Sometimes people stare at me, but I don’t care, I’ve got the cash. When I’m wearing jeans and suspenders and an old jacket I look like a pauper - according to Connie - so bending over to pick up a coin fits well. It’s the rare occasion when a passerby asks if I need help getting up that hurts my ego. 

If they eliminate the penny, I will do a lot less picking up from the sidewalk.

These accumulated coins have a designated purpose.They go into our travel savings although that’s overflowing as we haven’t traveled much and unlikely to do so soon. 

My drive to save coins goes back to when I was a kid, we collected soda bottles and redeemed for the two cents or a nickel. Back then two nickel bottles got you an ice cream cone and three a slice of pizza. 

Why not save your coins, why let one lay on the ground? Who cares what people think?😎

I’m trying for the old method of saving a penny a day and doubling it each day for 30 days. It’s like a snowball rolling down a hill and getting larger as it rolls. 🤑

On day 1, you start with just $0.01.
On day 2, you double it to $0.02.
By day 10, you’re at $5.12

etc. 

Keep that up for 30 days and you have $5,368,709.12.

Good luck. ‼️

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Spreading Your Bets

YOU MAY BE FAMILIAR with Peter Lynch. In the 1970s and ‘80s, he was one of the most visible figures in the investment world. As manager of Fidelity Magellan Fund, he achieved the best track record, by far, among his peers. He shared his wisdom in a series of popular books for individual investors.

Among the ideas for which Lynch is best known is the notion of “diworsification.” As its name suggests, Lynch argued that diversification simply for the sake of diversification isn’t always a good thing. If a portfolio is diversified in ways that detract from performance, it ends up being counterproductive.

This argument poses a challenge for individual investors. Especially this year, amid a rocky stock market, diversifying seems like the right thing to do, and that’s a broadly held view. Diversification is often referred to as the first rule of investing. So why do Lynch and others disagree, and what’s the best approach for individual investors?

The arguments for diversification are straightforward. Because investments rarely move in lockstep with each other, it’s helpful to have a mix of holdings. If share prices don’t all move up and down together, having a mix of stocks—especially in combination with a mix of bonds—can help dampen a portfolio’s price swings. Because of this dynamic, it’s almost a truism of personal finance that diversification simply makes sense.

This view has been broadly accepted in finance at least since the 1950s, when Harry Markowitz wrote his Ph.D. thesis on the topic. Markowitz’s paper is full of detailed formulas. But even before Markowitz, the intuition behind diversification was well understood. King Solomon offered this advice: “Invest in seven ventures or eight; you do not know what disaster may come.” Similarly, there’s the popular aphorism “don’t put all your eggs in one basket.”

But not everyone shares this view. In 1885, industrialist Andrew Carnegie gave a commencement address at a local college, and here’s what he said: “Don’t put all your eggs in one basket is all wrong.” He criticized those who scattered their investments “in this, or that, or the other, here, there and everywhere.” Scattered efforts, he felt, led to scattered results. Instead, Carnegie advised the audience, “Put all your eggs in one basket, then watch that basket very carefully.” In other speeches, Carnegie echoed this theme. “The great successes in life,” he said, “are made by concentration.”

Over the years, numerous investors have seized on this philosophy. Hedge fund manager Stanley Druckenmiller has cited this as his guiding principle. “All the great investors have made their fortunes by doing the opposite of diversifying,” he’s said, citing Warren Buffett and other fellow fund managers. According to Druckenmiller, Carl Icahn once put half his net worth into one stock—Apple—and made a fortune.

Warren Buffett has been maybe the most vocal proponent of this approach. “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

How can investors reconcile these viewpoints? On the one hand, diversification seems like the right thing to do, supported by both intuition and by decades of research. And yet some of the world’s greatest investors dismiss it with disdain.

The answer, I believe, is hiding in the details. Buffett says that diversification makes no sense, but he qualified that by adding “for those who know what they’re doing.” Similarly, Buffett’s late partner, Charlie Munger, once said, “The idea that a big portfolio of stocks is safer than a concentrated one is madness,” but added “assuming you know what you’re doing.”

In other words, holding an undiversified portfolio might make sense, but only if it’s your full-time job—that is, if you have the time to “watch that basket very carefully.” For ordinary people, Buffett and others agree that diversification makes good sense.

In fact, the reality is that even the greatest investors don’t always get it right. For years, Wells Fargo was one of Berkshire Hathaway’s largest holdings. But when a pattern of fraud came to light, the stock cratered, and Berkshire ultimately exited the investment. Stock-picking isn’t easy, even for these pros.

Risk of loss is one reason to avoid being too concentrated. But academic research has identified another reason to embrace diversification. As I’ve noted before, research by academic Hendrik Bessembinder has found, counterintuitively, that just a tiny fraction of stocks—4%—account for all of the stock market’s net gains relative to Treasury bills. The implication: If a portfolio isn’t sufficiently diversified, it runs the risk of excluding the next Apple or Nvidia, and that could be costly.

What does it mean to build a sufficiently diversified portfolio? For starters, it should be diversified along more than one dimension. Nearly every investor, in my view, should own a combination of stocks and bonds. In addition, holding cash can help carry a portfolio through years like 2022, when both stocks and bonds were down. Next, look to diversify within bonds and within stocks.

The market this year, in fact, has delivered a picture-perfect example of why diversification matters. For the past 15 years, investors have been punished for choosing virtually anything other than the S&P 500. But this year we've seen that reverse. International markets have outperformed. Meanwhile, within the U.S., value stocks have outperformed growth stocks like the “Magnificent Seven” that have led the market for years. Diversification, in short, can test investors’ patience. But as we’ve seen recently, it can pay off when we least expect it.

A note of caution: While diversification is important, it’s also important to diversify sensibly. In 401(k) plans, researchers have found that plan participants sometimes choose investments in ways that only look diversified. One study, for example, found that investors used a “1/N” approach to allocating their 401(k) funds, putting an equal amount into each fund regardless of fund type. Another study found that 401(k) participants exhibited “alphabeticity” bias. They diversified but tended to pick from the top of the list.

How can you avoid these pitfalls? A rule of thumb I suggest: Select investments in a way that covers all of the world’s major stock markets but with as little overlap as possible. For bonds, where exchange rate fluctuations can easily offset any gains, I recommend that investors stay closer to home. A sensible mix of domestic bonds, in my view, is perfectly sufficient.

Also keep in mind that diversification isn’t just about portfolio management. Several years ago, I suggested five other ways to diversify, and there are likely many more. It is, I believe, the golden rule of personal finance.

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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No financial wisdom here other than ….

From looking at the forum posts, Most HD readers are calm and it seems not worried about the markets.  I really don’t believe that because what has happened in the last week and a half has been unprecedented and there is no end in sight.
Without injecting politics into the discussion how are we HD readers going to handle the next 45 months of this turmoil that is caused by the whims of one man who doesn’t understand economics and no one else in his cabinet no matter how bright and successful somehow agreed to be a yes man.  I’m looking for a real discussion about how to protect my retirement savings.  There, I said it.

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How Big is Your Umbrella?

Many HumbleDollar readers have saved and invested regularly over their working years and were able to retire comfortably. Unfortunately, a lawsuit could threaten that financial security.

One possible scenario: If, heaven forbid, you are involved in a traffic accident resulting in severe bodily injury or loss of life, a legal judgement against you could destroy your nest egg.

The liability coverage on a home or auto policy may not offer enough protection. For this reason, we are encouraged to purchase an additional umbrella policy.

Umbrella policies are usually sold in increments of one million dollars of coverage. Each additional increment raises the premium. But how much coverage do you really need?

The only recommendation I’ve run across is to match umbrella coverage to your net worth. But that is unsatisfying. If, for example, your net worth is $50 million, I can’t imagine you need $50 million of coverage.

For those HD readers who have an umbrella policy, how much coverage do you have, and how did you arrive at that figure? Have you ever heard of a rule of thumb for determining what a proper level of coverage might be?

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Don’t Push It

I'M ALL IN FAVOR of striving. But I’ve also belatedly come to see the appeal of acceptance.

Should we strive for more, or should we accept what we currently have and what’s currently on offer? As I’ve noted in earlier articles, there’s great pleasure in striving. We love the feeling of making progress, even if our achievements don’t make us happy for long. It’s an instinct we no doubt inherited from our hunter-gatherer ancestors. Their striving is the reason they were able to survive and reproduce, and hence the reason we’re here today.

Despite my terminal cancer diagnosis, I continue to set goals and strive toward them. Each day, I put in hours keeping HumbleDollar chugging along, trying to stay in shape and working on various writing projects. Still, striving in some areas of our life doesn’t preclude acceptance in others.

We should accept the limits of our talents. We’re told that if we work hard, we can achieve anything we set our sights on. Really? We all know that’s not true of athletic and artistic endeavors. No matter how hard I worked, I simply never had the talent to be, say, a pro athlete or a concert pianist.

Sometimes, gauging our talent is trickier. It took a while, but eventually I discovered during my career that I wasn’t an especially good manager and that my efforts to write about topics other than personal finance never turned out quite as well as I’d hoped.

To be sure, some folks are more successful than their talents would suggest. Hard work may have played a role. But there was likely also an element of luck. That’s great—but it hardly seems like something we should bank on.

We should accept that we’ll never be fully satisfied. We imagine that our next accomplishment will leave us happy forever, but then we end up moving the goal posts and targeting some new achievement. That’s just the way we humans are: We love to strive.

But we should also accept that this striving will never leave us with that ultimate sense of accomplishment that we crave. That doesn’t mean we should stop striving. But we should accept that it’s the journey we enjoy, and the destination won’t leave us permanently happier.

We should accept that we’re unlikely to outpace the market averages. Want to outperform most other investors? The surest way is not to try—by simply buying index funds and collecting the performance of the market averages. Because of fund expenses and trading costs, index funds typically trail behind their benchmark index. But that’s better than most active investors, who lag by even more.

We should accept that there are things we can’t control. We might be able to control our own behavior, though even that can be a struggle. What if we try to control the behavior of others? Life can get awfully frustrating awfully fast.

This is crystal clear in the world of investing. We can control how much risk we take, the investment costs we incur, and our own buying and selling. But we can’t control the behavior of other investors, as reflected in ever-fluctuating stock and bond prices. Instead, we need an investment strategy that doesn’t depend on others behaving the way we want, at least in the short-term. Got just a few years to invest? Don’t count on other investors acting on your wishes and bidding up the price of the stocks you own.

We should accept our own mortality. We may continue to strive every day. But this can’t go on forever and, in my case, probably not for much longer. When do I stop striving and accept the inevitable?

I don’t have the answer, but I suspect the question will be answered for me. With each passing month, I move more slowly and I have less energy. I haven’t chosen to strive less, but it seems I am.

As I observe what’s happening to me, I imagine that I’m aging, like so many before me, but for me it’s happening over months, rather than decades. I’m not saying this slowing down is enjoyable. But it also isn’t so terrible—because I feel like it’s helping me to accept what’s to come.

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

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What is the risk level of sitting on the sidelines when it comes to bonds?

I posted this as a follow-up question in another thread, but it more appropriately should be a separate thread, so here goes:

One reason often cited for not trying to time the market when it comes to stocks is that a large chunk of their gains comes during a small number of days. So if you’re on the sidelines then, you really miss out.

Is there a similar phenomenon with bond ETFs and funds? That is, do they tend to have big gains on just a few days? My guess is that their situation is different from stocks in this respect, but that’s just a guess.

Does anyone happen to know what history tells us?

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Wherever You Live, Your Home is (Probably) Under-Insured

A couple of days ago I chanced on this following very detailed and very lengthy article from the SF Chronicle:

https://www.sfchronicle.com/california/article/underinsured-home-what-to-do-20250824.php

This is behind a paywall, but if you haven’t been to the newspaper website recently you can probably read it. I am going to try to summarize some of the content.

Let me begin by putting a personal spin on this topic. I spent 30 years in the property and casualty insurance world. But, like you I have to insure my own home. I have my home insurance with USAA as I am a former officer in the military and qualified to buy from them.

Even though I am retired, I still know folks in the business and try to understand what is going on in the industry. Through this process, I began to be concerned about whether or not I had enough coverage on my WA home. Two years ago, I heard reports that it was costing significantly more to rebuild than what insurance companies were recommending. I went on-line to the USAA site and went through their coverage estimator with the details on my home including square footage, the size of decks and porches, floor coverings, age of building, type of roof material and age, kitchen and bath quality and number of fixtures, and more. At the end of the process, I compared their recommendation to what I had heard about the cost per square foot to rebuild. The company was around $80/SF too low. On a 2500SF home, this is $200,000 too low!

At the time, I didn’t worry about the how and why of this was happening. I simply fixed my problem by increasing my coverage so that I was closer to what it might cost to rebuild the home. However, when I saw this article, some alarm bells began ringing in my mind. I had previously posted here about the under-insurance that is commonly found after catastrophic fires, attributing this to supply and demand turmoil after a big fire event. Now, this article explains what is going on. When I was working Marshal and Swift provided the software companies used to calculate reconstruction costs. However over the last 20+ years they have been replaced with other software. This newer software is more complicated but also allows for agents to low-ball the factors to produce a lower replacement cost and more competitive premium so that they can sell more policies. If you had to actually go through the details with an agent the interview might take 4 hours to complete. No doubt, this would be a sales killer. Who among us wants to discuss insurance on the phone for four hours?

The companies appear to know all about this issue. Insurance companies are like wildebeests, they travel in herds, so most of them use the same software. They correctly maintain, that it is up to the insured to make sure that they have enough coverage. As a homeowner, it is up to you. Especially, if you live in an area exposed to wild fires or other catastrophe, no matter that you think you are already paying way too much for your house insurance, you are most likely significantly under-insured. In a high cost of living area it might cost $300-500/SF to replace your home…….do the math, talk to your agent and ask for a realistic estimate to rebuild. Be honest about your home details. Bite the bullet, and buy the increase. Choose a higher deductible. If you wait until after the fire it will be too late….

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