Jonathan Clements's Blog, page 67

Equally Bad?

FOR YEARS, THERE’S been growing concern about the top-heavy nature of the U.S. market. Today, just 10 stocks account for 35% of the S&P 500’s total value. And while the largest technology stocks—dubbed the Magnificent Seven—have done exceedingly well in recent years, their extreme outperformance is making people nervous.

Observers are comparing today’s market to past periods when certain groups of stocks appeared similarly flawless. Consider the late 1990s, when companies such as General Electric dominated the market. GE was for a time the largest company in the S&P 500 until it essentially disintegrated. Going back further, in the 1970s, there was the Nifty 50, which included once-admired companies like Xerox, Polaroid and Kodak. For all these reasons, there’s been a growing unease about the state of today’s market.

A week ago, I discussed one possible solution: To offset the risk posed by a top-heavy market, investors could incorporate a value-oriented fund into their portfolio. Another approach would be to own a fund tracking an alternative to the S&P 500 known as the S&P 500 Equal Weight Index. As its name suggests, this version of the S&P 500 holds each of the 500 stocks in equal amounts—about 0.2% each. Result: The Magnificent Seven as a group would account for just a 1.4% weighting, far less than their 31% weight in the standard index. Should the performance of these stocks be less magnificent in the future, this would lessen the impact.

Equal weighting’s potential benefit is clear. If we look back to years when the market struggled, we can see how an equal-weight strategy would have helped. In 2022, when the S&P 500 dropped more than 18%, the equal-weight index lost less than 12%. And it wasn’t just that one year.

Over the past 20 years, the equal-weight index has outperformed the standard index in nearly half of annual periods, so equal weighting might seem attractive. But when it comes to investing, we’re stuck with the age-old conundrum: that all data are necessarily backward-looking, while all decisions are—by definition—forward-looking. In other words, there are no guarantees.

Owing to its structure, the equal-weight index has challenges of its own. For starters, there aren’t many options for investing in this index. Like any market where there isn’t a lot of competition, costs end up being higher. The most popular equal-weight ETF is an Invesco fund (symbol: RSP) with an expense ratio of 0.2%. By way of comparison, the Vanguard ETF that tracks the standard S&P 500 (VOO) charges just 0.03%.

Another point in favor of traditional market indexes: While it’s easy to fret about the ability of the Magnificent Seven to remain as exceptional as they’ve been, it’s important to give them their due. There’s a reason they’ve become so valuable. Look at them through virtually any lens—revenue growth, market share, profit margins—and you’ll see how different this handful of companies is from nearly all its peers.

And their scale is enormous. Netflix has 278 million subscribers. Amazon has 200 million Prime members. Each day, 3.3 billion people use Meta’s apps Facebook, Instagram and WhatsApp. Last year, Apple sold 234 million iPhones and brought in revenue of $383 billion. That’s more than the revenue of the smallest 107 companies in the S&P 500 combined.

There’s a more fundamental reason why you might not want to jump with both feet into an equal-weight index, and this is maybe more philosophical. Investment researcher Darius Foroux makes the following argument in favor of the traditional, market-cap weighted index. Referring to the Magnificent Seven, he writes, “They’re not just big. They’re the winners in our economy…. Each of those seven companies dominates their industry. When you opt for a market-cap-weighted index, you’re placing a bet on these winners. In finance, winners take most of the rewards. So that’s where you want to be.”

It’s an interesting argument, and it has a lot of validity. But this is where investors also need to keep their feet on the ground. Just because a company is a winner and has been growing quickly doesn’t guarantee future success. Indeed, many of today’s Magnificent Seven were once startups themselves and supplanted competitors that, at the time, looked dominant. Netflix unseated Blockbuster. Facebook overtook MySpace. The iPhone drove BlackBerry into obscurity. And Microsoft, led by a 20-year-old Bill Gates, displaced IBM from its position atop the computer industry.

The valuations of these companies present risk because they assume continued success. Consider Amazon's price-to-earnings (P/E) ratio of 32 based on next year’s projected earnings of $5.80 per share. If earnings continue to grow at a pace similar to what we’ve seen in recent years—between 20% and 30% per year—that valuation multiple doesn’t look too unreasonable. If Amazon earns $7.30 a share in 2026, as Wall Street expects, then its P/E multiple based on 2026 earnings would be closer to 26—still high, but much more reasonable than the current 32.

But if earnings fall short of expectations, the stock could suffer what’s known as a “re-rating.” That occurs when investors decide that a company’s growth prospects are less certain and, as a result, assign its stock a lower multiple. That’s a dreaded scenario for a stock: A lower earnings number multiplied by a lower P/E ratio could translate to a far lower share price. Worse still, re-ratings tend to occur quickly and without warning.

We saw this sort of thing just recently. Tesla held an event to show off a set of new products, but investors were distinctly unimpressed, causing the stock to fall 9% in a day when Wall Street analysts cut their earnings estimates for the coming years.

Where does this leave us? If the traditional market index is top-heavy, but the equal-weight alternative has drawbacks of its own, how should investors thread the needle on this question? The first step I recommend is to conduct a risk assessment. If the concern is about the concentration in the S&P 500, start by giving your portfolio an X-Ray. See how much you have riding on the S&P. If you have a balanced portfolio of stocks and bonds, and if the stock side of your portfolio is diversified, the overall concentration risk may be modest.

On the other hand, if you find that your portfolio is very heavily weighted toward the most expensive stocks, you might consider a small position in an equal-weight fund.

Choosing to diversify means there will, by definition, always be something that’s underperforming in your portfolio. That can be frustrating, especially when it seems so easy to make money by betting only on what’s worked in recent years. But that, as we know, is what psychologists call recency bias. And that’s why, as always, I recommend a balanced approach, one which allows investors to sleep at night no matter which way the market goes.

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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Death Benefits

I TURN AGE 62 IN January—which means I could claim Social Security retirement benefits and perhaps collect at least a few monthly checks before I succumb to cancer.

But is that the smartest strategy? One of my top priorities is ensuring Elaine is financially comfortable after I’m gone, so I want to make sure she gets as much from Social Security as possible.

We got married in late May, a few days after I was told I had lung cancer that had metastasized to my brain and elsewhere. We were already engaged, but we moved up the wedding by two weeks when I got my diagnosis.

By itself, getting married doesn’t ensure that Elaine will be entitled to Social Security survivor benefits based on my earnings record. Instead, I also need to live another nine months after our wedding date. Initially, that didn’t seem like a sure thing.

After four months of chemotherapy and immunotherapy, my prospects seem better, though still not great. Twelve days ago, a scan turned up a pulmonary embolism, and I'm now on blood thinners. But assuming l make it to late February 2025, and thus Elaine does indeed qualify for survivor benefits, what’s the best claiming strategy?

I wanted to make sure I got it right, so I ran my thoughts past Mike Piper of ObliviousInvestor.com. Mike is the brains behind Open Social Security, the free online calculator, and author of Social Security Made Simple.

What makes the claiming decision so tricky? Not only are the rules complicated, but also widows and widowers have unusual flexibility when it comes to Social Security. They can start their own benefit based on their own earnings record and then later swap to survivor benefits. Alternatively, they can go the other way, beginning with survivor benefits and then later claiming their own benefit.

Which is the better strategy? It’ll vary from couple to couple. Here are the two scenarios that I analyzed for Elaine:

Strategy No. 1: Elaine claims survivor benefits upon my death and then applies for her own benefit at age 70.

Widows and widowers can receive survivor benefits as early as age 60, or age 50 if they’re disabled. But they take a haircut for claiming survivor benefits before their full Social Security retirement age, which is age 67 for both Elaine and me.

Let’s assume Elaine, who’s a few years younger than me, is 62 when I die. Because she’d be claiming survivor benefits five years before her full retirement age, her survivor benefit would be some 80% of my full retirement age benefit.

The good news: Elaine could later swap to her own benefit based on her own earnings record. Let’s say she does so at age 70, when her own benefit would be at its maximum. Her age 70 benefit would be an inflation-adjusted 25% larger than her survivor benefit.

What if I claim Social Security before I die? It’s tempting—and, to my surprise, it likely wouldn’t make much difference to the survivor benefit Elaine receives in scenario No. 1. If I take benefits during my lifetime, it would potentially cap Elaine’s survivor benefit at 82.5% of my age 67 benefit, not much different from where Elaine would end up if I didn’t claim benefits and she took survivor benefits at 62 or 63.

Still, I’ve decided not to claim early. Why not? For starters, if I apply for benefits in January, I’d likely “fail” the Social Security earnings test in 2025, meaning that my earned income next year will probably be sufficiently high that I’d be deemed ineligible for benefits. The earnings test applies to those who haven’t yet reached their full Social Security retirement age.

Would Elaine’s survivor benefit be increased to reflect the benefits I lost to the earnings test? That might happen—but there’s a limit to Social Security’s generosity. Remember, if I claim benefits, Elaine’s survivor benefit is potentially capped at 82.5% of my full retirement age benefit.

On top of that, if I claimed early, it would put the kibosh on strategy No. 2. How so? The crux of the second strategy is to delay survivor benefits until 67 to get 100% of my full retirement age benefit—and yet Elaine would likely be limited to 82.5%.

Strategy No. 2: Elaine claims her own benefit at 62 and delays survivor benefits until 67. There’s no point in Elaine delaying survivor benefits beyond her full retirement age of 67, because—unlike benefits based on your own earnings record—you get no boost in survivor benefits for postponing beyond that age.

How would strategy No. 2 play out? From 62 to 67, Elaine’s monthly benefit would be 30% less than in scenario No. 1.

Things look much better from age 67 on, when she swaps from her own benefit to survivor benefits based on my earnings record. That benefit would be equal to 100% of what I could have received at 67—and 79% higher than the benefit Elaine would collect from age 62 to 67.

In fact, that survivor benefit at 67 would be comparable to what Elaine would have received if she delayed her own benefit until age 70—the situation we considered in scenario No. 1. The reason the two benefits are similar: I had somewhat higher lifetime earnings.

Despite that, it turns out the better strategy is No. 1, where Elaine applies for survivor benefits upon my death and then swaps to her own benefit at 70. How much better is strategy No. 1? I calculate that, over her lifetime, it would leave Elaine roughly $27,000 ahead, figured in today’s dollars.

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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Something About Harry

WHO'S YOUR FINANCIAL hero? This should be someone whose qualities and character lend themselves to emulation in your own financial life.

Let’s set some ground rules here for picking a financial hero. First, your hero probably shouldn’t be the usual suspect: Warren Buffett. While Buffett is certainly a very successful investor, the investment game that he’s playing is very different from the one most of the rest of us are.

The same goes for folks like Elon Musk, Jeff Bezos and Bill Gates. People can certainly admire these titans. But they’re systems changers, not just people looking to do well in a particular industry. They’re as appropriate for emulation by common investors or business owners as is George Patton for someone wanting a standard military career.

Second, you probably shouldn’t be related to your hero. You would be too close to that person to see clearly. And if your potential heroes are your parents, they probably played the financial game 40 or 50 years ago. The rules have changed.

Your financial hero should be basically a normal person not related to you who exhibited extraordinary qualities. For me, that person is a guy named Harry. He’s about 10 years older than I am. While I’ve never met Harry—and probably never will—we actually have the same hometown, Erie, Pennsylvania.

Indeed, Harry and I went to the same high school: Cathedral Prep. When he and I attended a decade apart, Prep was all male, academically rigorous and full of hazing. Spending four years there was a rough-and-tumble experience in the 1970s and 1980s.

I imagine a 14-year-old Harry having English with the ruler-wielding nuns who taught me. I also think about Harry perhaps playing dodgeball, and giving and receiving wedgies. Harry probably did calculus and trig problems at the same blackboards I stood at.

After graduation, Harry—as most of us from Prep did—went to college. He earned a bachelor’s degree in business administration from Loyola University of Maryland and, eventually, a master’s in finance from Boston College. He got married and had a couple of kids, while working in the financial services industry in Massachusetts.

Harry was enjoying, by almost all measures, a successful professional and personal life. Then he did something truly remarkable. Harry uncovered the biggest financial fraudster in U.S. history: Bernie Madoff.

Madoff’s Ponzi scheme swindled investors—including actors John Malkovich and Kevin Bacon—of about $65 billion. In his work to expose Madoff, Harry Markopolos displayed several qualities that make him worthy of emulation in personal finance.

First, Markopolos did his homework and knew that, if something seems too good to be true, it probably is. Markopolos discovered that Madoff’s hedge fund was returning 1% to 2% each month to investors consistently. If there’s one rule in investing that I’ve learned, it’s that to expect consistent returns is foolish. Volatility is the norm. Using common sense and math, Markopolos realized almost instantly that Madoff’s returns were impossible to achieve in any legal way.

Being proactive in research and being able to recognize when somebody or something is promising too much are excellent qualities to have in personal finance. From television-celebrity whole-life insurance salespeople to sharky advisors, folks can and will promise almost anything to part you from your money. Being possessed of what Ernest Hemingway called a “bullshit detector” can help to make you safe.

Second, once Markopolos realized that he was right about Madoff, he believed in himself and his abilities enough to relentlessly pursue his goal of exposing the fraudster. From 2000 to 2005, Markopolos kept nudging the Securities and Exchange Commission to investigate Madoff. Initially ignored, he pursued his goal. It took Madoff’s sons confessing to the SEC in 2008 to finally bring down the fraudster. If the Feds would have listened to Markopolos, some family fortunes might not have been completely lost.

This kind of persistence is a great quality for an investor to have. It takes a lot of fortitude to invest in the stock market. You have to begin, and you have to keep doing the same thing over and over again for years and decades, to achieve a result. According to an article on the website Liquidity Provider, the market is up only about 54% of trading days each year. Having Markopolos’ tenacity can serve you well over a long investing career.

Third, Markopolos displayed courage. While the late Bernie Madoff spent his last years in disgrace and in prison, earlier in his life, he was quite powerful. Having given donations to the likes of Senator Chuck Schumer, now the Majority Leader, Madoff had friends in high places. Some of those friends included people in positions of power at the SEC. In addition, Madoff was once chairman of the Nasdaq stock exchange. To start accusing somebody like Madoff took a lot of courage.

This ability to control your fear will serve you well in investing. For example, even though I knew in 2020 that the absolutely gut-wrenching declines occasioned by the pandemic would reverse, there were moments in which I struggled to control very strong impulses. No doubt exists that these kinds of disasters will occur again. Having the ability to be brave in the face of overwhelming market losses is key to success.

Markopolos is a hero to me because he was just a regular person who stumbled onto something massive, and he had the internal fortitude to forge ahead with what he knew was right. He was smart, persistent and brave. I endeavor to bring those qualities to my own financial life.

Who is your financial hero or heroine? What qualities does he or she possess that you admire? For me, there will always be something about Harry.

Douglas W. Texter is an associate professor of English at Johnson County Community College in Overland Park, Kansas. Doug teaches a composition I course that focuses on personal finance. His essays and fiction have appeared in venues such as the Chronicle of Higher Education, Utopian Studies, New English Review and The Writers of the Future Anthology. Check out Doug's previous articles.

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Budgeting Time

I WAS FORTUNATE to find enough time during my working years to pursue various hobbies and other personal interests. My part-time work arrangement allowed me to have four-day weekends. I’d hoped that, after retirement, I would have even more time to take on personal projects.

But surprisingly, I found myself with less free time. Not only was I failing to start new projects, such as writing software for the website of the nonprofit I cofounded, but also I was struggling to keep up with my current commitments. It stressed me out.

An obvious explanation was travel. Since retiring, I’d taken several trips with friends and family, including a few multi-week vacations. I’d also devoted significant time to catching up with old friends. Yet this didn’t fully account for where my time was going, especially during the weeks I was home.

I had a similar experience in my career when I first took on a managerial role. Once I became a manager, I found myself struggling to cope with a growing backlog of work. I began each day by preparing a to-do list, only to find that, by the end of the day, most of the items remained untouched.

Frustrated and exhausted, I set out to address my time management issue. I resorted to a rather crude method to get to the bottom of it. I meticulously kept a detailed journal to record my activities hour by hour. After maintaining the time log for several weeks, I reviewed it and my problems became self-evident.

The primary source of time leakage was my habit of frequently checking emails and rushing to respond to incoming messages as soon as they appeared in my inbox. The second major time drain was attending numerous meetings, many of which weren’t essential. My days were so fragmented between emails and meetings that I had little time to accomplish anything substantial.

Once I identified the culprits, I brought more discipline to my daily routine. I shifted away from the compulsive always-on work style and blocked large segments of my daily calendar for important tasks. I minimized email interruption by turning off notifications for most of the day.

I also went on a meeting diet, attending only those I deemed essential. These adjustments helped me reclaim much of the time I’d been losing, without any noticeable downside.

I borrowed a page from my own playbook to solve my retirement’s time-crunch mystery. I kept detailed records of my activities for three weeks and then reviewed them. Unlike last time, I couldn’t pinpoint one or two factors draining my time. I was simply stretching myself too thin across multiple activities and goals.

To address this, I decided to experiment with a budgeting technique. A humble confession: I’ve never found success with conventional budgets, especially those requiring detailed categorization and tracking of every dollar spent. I admire those who have the patience to meticulously monitor their expenses—I’m just not one of them.

Instead, throughout my earning years, I adopted a reverse budget: I saved first and spent what was left. I applied this same technique to manage my time in retirement. I decided to allocate 50 hours a week for my personal use, and spend the rest on everything else.

Why 50 hours? My rough calculation went like this: First, I committed the weekends completely for family time. I estimated that my basic needs—things like nightly sleep and occasional naps, showers and hygiene, meals, routine chores and so on—took almost 14 hours each day. If that sounds like a lot, it’s because I prefer things slow and easy.

That left me 10 hours a day for five weekdays, or 50 hours a week, dedicated to my personal pursuits. To keep things simple, I decided to split this time evenly among my five different interests, spending roughly 10 hours a week on each:

1. Physical fitness. I exercise each day, but I don’t enjoy it. I dislike it so much that I spend nearly an hour each day mentally preparing myself to get started. The actual workout lasts barely 45 to 60 minutes. If you include a few minutes for cooling down, it turns into a two-hour task.

Despite my dislike of physical exercise, I take it seriously. I want to stay fit, or at least slow the deterioration of my physical abilities. Listening to podcasts during my workouts helps reduce the boredom. I also mix up my exercise between swimming at a local community club, walking outdoors and strength training. Regardless of the form of exercise, it’s often the least enjoyable two hours of my day.

2. Hobbies. I enjoy acquiring or honing skills that align with my hobbies. Currently, part of my hobby time goes to practicing the flute, at least when my wife and daughter aren’t home to complain about the occasional squeaky or off-tune notes.

I’m also learning Spanish. Sí, quiero aprender español para poder viajar a México y otros países de habla hispana con más confianza. Progress is slow but promising.

3. Social connections. I make a concerted effort to stay connected with people. This includes mentoring through our nonprofit to provide investment and financial education, catching up one-on-one with friends and former coworkers, giving informal music lessons to acquaintances, and so on. When I don’t feel like meeting anyone, I write online articles for audiences I care about.

4. Continuing education. I want to stay current on topics related to finance, economics, behavioral psychology and anything that catches my interest. Thanks to numerous sources such as Coursera, edX and MIT, there’s no shortage of online classes from reputed educators. If I’m not enrolled in a class, I’ll often read nonfiction.

5. Doing nothing. Finally, I reserve the remaining 10 hours a week for doing nothing, unless something unplanned comes up. I simply sit by the window with a pot of tea, look outside and let my mind wander.

My new schedule is already showing results. While my days are busy, I’m no longer overwhelmed with dozens of things that have little significance.

Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and cofounder of Dollar Mentor, a 501(c)(3) nonprofit organization offering free investment and financial education. Follow his nonprofit on LinkedIn, and check out Sanjib's earlier articles.

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Who Influences You?

MOTIVATIONAL SPEAKER Jim Rohn said, “You are the average of the five people you spend the most time with.” His contention: We should carefully pick the folks who surround us because, over time, we’ll become more like them.

Recent research offers some support for this idea. For instance, if we have a close friend who becomes obese, one study found we’re 57% more likely to become obese as well. If that’s so, we might also want to cozy up to skinny friends who count exercise as fun recreation.

We don’t always get to choose the people we spend time with, especially in our early years. Families have an enormous influence on who we become, in part because we spend so much time with them. If we’re lucky, and come from good people, we’ll learn to be like them. The opposite is true as well, however.

Steve Jobs of Apple fame was influenced not by his birth family, who gave him up for adoption. Instead, he was strongly influenced by his adoptive father, with whom he spent much time.

His adoptive father worked on cars. He bought and sold them to supplement his income. He would take Steve with him on rides when he went searching for his next car. He’d describe to Steve the beauty he saw in the design of cars he wanted to buy. As he described the lines, the shape and the flow of the metal, Steve grew to appreciate good design.

This influenced Steve later when it came to Apple products. He always believed a product’s design was as important as its function. The elegant simplicity of Apple products made them appealing to millions of buyers.

We’re all influenced by the people in our lives. I hope, though, that we can choose which people to adopt as an influencer—and which to drop. We can copy the things we admire in some, and steer away from the deficiencies we see in others.

That’s been the case in my life. My desire to complete my college education came after witnessing the struggles my father endured by not completing his degree. My mother’s focus on saving money helped me pay attention to future needs, and not just to today’s material desires.

I’m always amazed at people who overcome their impoverished upbringing. The rapper Jay-Z, for example, used to sell drugs in Brooklyn—and that’s where he learned how to run a business.

Others who are born into poverty will blame anyone and everyone for why they are who they are. Their influencers didn’t help them, but rather limited their potential. If they saw family members who never made it, they might assume that they couldn't make it, either. For many, a negative influencer holds a stronger grip than a positive one.

We don’t always get to select the people who are in our lives. We do, however, get to decide how much we want them to influence us. The choice is ours to make.

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Mob Rule

BENJAMIN GRAHAM was Warren Buffett’s teacher and mentor. He also ran an investment fund that specialized in uncovering demonstrably undervalued stocks.

One day in 1926, Graham was at his desk, reading through a government report on railroads, when he noticed a potentially important footnote. It referenced assets held by a number of oil pipeline companies. But there wasn’t a lot of detail, so Graham boarded a train to Washington and found his way to the Interstate Commerce Commission (ICC), where he thought he might get more information.

What Graham uncovered in the ICC’s dusty offices confirmed what the footnote had suggested—that many pipeline companies, due to a quirk of history, held assets that were worth far more than the companies themselves. Northern Pipe Line’s shares, for example, were trading at $65, but the company held bonds worth $95 per share. It was about as obvious an investment opportunity as ever existed. Graham began purchasing Northern shares and, after discussions with the company’s management, eventually unlocked $110 per share for investors. This investment was an almost no-lose situation, but it was one that other investors hadn’t noticed because the information was so inaccessible.

Today, the world is different. The sort of data that Graham had to look for in a government filing cabinet are now readily available online. Rarely, if ever, is there public information that isn’t in digital form. It’s for that reason that the market is regarded as more efficient today. Stock prices are seen as being more accurate because the relevant data have been factored in.

This development is generally seen as positive. Greater access to information allows investors to make more fully informed decisions. You may recall Enron, for example, where an accounting fraud brought down the company. What caused the fraud to unravel? A reporter named Bethany McLean took a close look at the company’s annual report online and concluded that the numbers didn’t add up.

She published her initial findings in the March 2001 issue of Fortune, and by December the company had filed for bankruptcy. It was a stunning fall, all prompted by the research of a single reporter working from her desk. Looking at examples like this, today’s market seems far more efficient than it was in Graham’s time, when Enron might have been able to continue its fraud undetected for far longer.

In a recent paper, though, Clifford Asness, an investment researcher and fund manager, suggests that conventional wisdom might be wrong—that the market might be less efficient today than it was in the past, despite the improved access to data. To support his claim, Asness looks at market valuation as a proxy for market efficiency. Specifically, he looked at the valuation gap between the most expensive and least expensive stocks, and examined how that gap has changed over time. What he found is that this ratio has been rising steadily for years and, through a number of lenses, it has become more extreme. You can see an illustration of this in his paper.

This valuation trend is evidence of inefficiency, Asness argues, for the simple reason that it’s irrational for investors to overpay for stocks. It’s a pillar of market efficiency, in fact, that prices should reflect all available data. Asness reasons that if investors were reading the data rationally, they’d be making different decisions, and that would cause the valuation gap to close. But that’s not what’s happening.

If investors have more information today, why would they be making decisions that seem contrary to the data? Asness explores a variety of possible explanations. In the end, he concludes, ironically, that it’s the internet itself that’s made the market less efficient.

On the one hand, the web can be a source of reliable information—as it was for Bethany McLean. But on balance, Asness calls it a “fever swamp” of misinformation. In the past, there was the notion of the wisdom of crowds, which posited that groups of people together make better decisions. But Asness feels that today’s social media has produced the opposite result, turning large groups of people into “a coordinated clueless and even dangerous mob.”

We saw this sort of un-wise mob dynamic with the meme stock craze in 2021, when groups of investors bid up the shares of bankrupt and nearly bankrupt companies. Their leader: a YouTube personality who called himself Roaring Kitty. That year also saw a boom in special purpose acquisition companies (SPACs) and other questionable investments.

While that period was perhaps extreme, the valuation data Asness presents suggest that the market is still less efficient than it used to be. The gap, in other words, between the most highly valued growth stocks and the most depressed value stocks doesn’t have a rational basis. If investors were looking more carefully at valuations, this argument goes, some of the most expensive growth stocks would see their valuations moderate, and some of the more depressed value stocks would see their price rise.

What’s the antidote? Asness believes that eventually reason will prevail. “Assuming a valuation change will continue to go on forever is obvious folly.” But he also knows that the current situation may not correct any time soon: “[D]epressingly, I’m saying you can do the right thing and still be wrong for about 30 years.” In other words, the market looks like it’s being irrational, but it might stay that way, perhaps for a while.

Where does this leave investors? In building a portfolio, I’d avoid making any big bets. If you start with a fund that tracks an index like the S&P 500—which includes both growth and value stocks—you’ll benefit regardless of which way things turn out. But recognizing that the market today is more heavily weighted toward growth stocks, you might incorporate a modest position in a fund that tilts toward value. That way, the bulk of your portfolio will be diversified, but you’ll have a thumb on the scale toward the stocks which, according to the data, are undervalued. If they eventually come back to life, you’ll benefit. If they don’t, you won’t have given up too much.

Most important, I’d avoid going to any one extreme. On the one hand, I’d stay away from riskier, growth-oriented funds like Invesco QQQ ETF. To be sure, their performance has been head and shoulders above the rest, but past performance doesn’t guarantee future results. And according to the data, these are the stocks that are most overpriced.

At the same time, as Asness says, the market isn’t always rational. I wouldn’t interpret the data he presents as reason to go in the other direction, to become overly conservative. When it comes to the stock market, as I’ve suggested before, try to take a balanced, center lane approach.

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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Sticking With Stocks

AT A FAMILY DINNER in the early 1980s, I remember one of my brothers—probably then age 20 or so—saying, “But isn’t the economy built on sand?”

My economist stepfather offered one of his trademark droll responses: “The economy’s always built on sand.”

The same could be said for the stock market. In the minds of many investors, it’s always teetering on the verge of collapse. After two years of rising share prices, and amid concerns about high stock valuations, the election, a possible recession and the Federal Reserve’s next move, that sense of unease seems especially acute right now.

Worried about a possible stock market decline? Here are five questions to ask yourself.

1. How much money will you need from your portfolio over the next five years? Historically, over most five-year periods, stocks have notched gains, even if they posted sharp losses at some point during that stretch. That’s why I typically suggest that folks get money they’ll need to withdraw from their portfolio over the next five years out of stocks and into nothing more adventurous than high-quality short-term bonds. That way, even if share prices plunge, investors should be able to sit tight and postpone any selling until share prices recover.

Indeed, when I talk to investors, I typically find they’d have no financial need to sell stocks over the next five years. Between their regular income—whether it’s from a paycheck, Social Security or a pension—and the money they have stashed in bonds and cash investments, they could easily wait out a big stock market decline. Still, there is risk—the risk these folks will make a panicky decision and dump stocks at depressed prices.

2. How much in new savings will you add to your portfolio in the years ahead? If you’re 30- or 40-years old, the biggest part of your future retirement portfolio is likely the cash you’ll invest between now and when you quit the workforce.

Let’s say you’re age 40, you have a $200,000 portfolio that’s entirely in stocks, and you’ll save $10,000 a year—or $250,000 total—between now and age 65. Arguably, your retirement nest egg is just 44% in stocks. Moreover, at least some of the money you’ll sock away over the next 25 years could be used to take advantage of stock market declines.

A key reason we’re free to invest heavily in stocks early in our adult life is our human capital—the fact that we don’t need regular income from our portfolio because we’re collecting a paycheck. As I see it, counting future savings as part of our cash holdings is one way to factor our human capital into our portfolio’s design.

3. How much of your wealth is invested in stocks? The market is a whiny child that’s forever throwing tantrums and demanding our attention. Yet, despite all the focus on the stock market’s ups and downs, it’s often a relatively small portion of many folks’ wealth.

Think of everything you own: stocks, bonds, cash investments and real estate. If you’re taking a broad view of your wealth, you might also include the value of your human capital, any business you own, Social Security, and any pension or income annuity you're entitled to. For those who aren’t retired or close to it, their ability to earn an income is likely their most valuable asset. You might even put a value on your household possessions and the cars that you own, though I’d discourage this. These probably aren’t things you can readily sell—because you can’t reasonably live without them.

Result? Do the math, and you’ll likely find stocks are a small part of your overall wealth, and hence any market slump would put only a modest dent in how much you’re worth.

4. How much could you potentially lose in a market crash? In a bear market decline, stocks lose some 35% on average. To think about what that loss might mean in dollar terms, take the total value of your stock portfolio and multiply it by 0.35.

Would that sort of short-term loss freak you out—or would you take it in stride? I suspect most folks will find the potential dollar loss is modest relative to their total wealth. But if the possible short-term hit seems unbearably large, this is probably a good moment to dial down your stock exposure, while share prices are near their all-time high.

5. How bad is the economy? The stock market’s long-run return is driven by growth in corporate earnings, and that hinges on the economy.

If the economy contracts, and you assume it keeps shrinking for many years, it’s easy to justify a huge drop in the stock market because of the massive hit to corporations' intrinsic value. That’s the sort of scenario that many investors—both professionals and amateurs—are apparently assuming whenever a recession looms and they think it makes sense to unload shares at 20% or 30% off. And yet, to find a stretch where we had negative economic growth for more than two calendar years in a row, you’d have to go back to the 1930s and 1940s.

What about recent decades, during which the government has been quicker to step in and help revive economic growth? The U.S. economy has been far less rocky. For instance, inflation-adjusted gross domestic product contracted 2.6% in 2009’s Great Recession and 2.2% during 2020’s pandemic. In both cases, the economy made up that lost ground the following year.

In other words, while a huge stock market decline might make sense if the economy shrank for multiple years in a row, that simply hasn’t happened in recent decades. Feeling nervous? Ignore your fellow investors—and instead pay attention to the U.S. economy's remarkable resilience.

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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Begin by Quitting

MANY FOLKS CLAIM TO be ready for retirement, both financially and psychologically. But they’re often surprised to discover that the reality is different from what they expected.

I started planning well in advance of my 2023 retirement. I read dozens of books on the subject, and talked to many classmates and friends who’d already retired. Of all the books and videos that I reviewed, one talk on YouTube stood out: a TEDx Talk by Dr. Riley Moynes on the four phases of retirement. The four phases he identifies are honeymoon, loss of identity, trial and error, and reinvention.

Based on my observations of recent and long-term retirees in two 55-plus communities, these four phases do indeed reflect what happens in retirement. But I also think two further phases need to be added.

Phase 1: Honeymoon. New retirees start traveling to exotic places, visit long-lost friends and relatives, and splurge on expensive things. Freedom from a nine-to-five job is liberating. Decades of saving and investing provide sufficient cash flow and a big enough nest egg to make retirement feel like one long vacation.

This phase can get derailed by unforeseen events. I know many who retired during the pandemic and stayed home for a while. The retirement honeymoon can also get derailed by a sudden change in your health or your partner's, or by the need to care for elderly parents.

Moynes says that, “Phase 1 lasts for a year or so, then it begins to lose its luster. We begin to feel a bit bored, and we ask ourselves, ‘Is that all there is to retirement?’”

When I retired, I didn’t spend much time in the honeymoon phase. I was clear about what I wanted to do and got busy right away.

Phase 2: Loss of identity. This is the phase when folks start regretting that they retired. They feel the loss of their old routine, their interactions with colleagues and their identity.

Moynes says that, "Phase 2 is also where we come face to face with the three Ds: divorce, depression and decline, both physical and mental. The result of all of this is we can feel like we have been hit by a bus.”

Phase 2 is a challenge that some retirees struggle to escape. Sometimes, health issues crop up, derailing dreams of an active lifestyle.

Phase 3: Trial and error. “In phase 3, we ask ourselves: How can I make my life meaningful again?” says Moynes. “How can I contribute? The answer often is to do things that you love to do and do well.”

This is a period of trial, error and experimentation. There could be many disappointments as you figure out what works for you. You might find yourself taking classes, trying new hobbies and expanding your social network. You may also decide to downsize or move.

This is the phase I’m in now, trying out different things. My writing for HumbleDollar is one such experiment.

Phase 4: Reinvent and rewire. This is the stage where we try to get the most out of retirement. Moynes encourages us to ask, “What’s the purpose here? What’s my mission? How can I squeeze all the juice out of retirement?”

In this phase, you’re reinventing yourself to make meaningful contributions. This could be one of the happiest phases. I see retirees starting a blog, a business or a charity, or helping the needy and volunteering. There are many ways to make contributions that are deeply satisfying.

To the above four phases, I’d add two more phases to cover the entire spectrum of retirement.

Phase 5: Routine. As you get older, your energy level decreases. You pick a routine to follow every day. A daily walk, healthy eating and meeting friends become important. I see retirees enjoying the simple things in life. It’s a blessing if you can maintain good health. This is also the time to develop a plan to manage your next phase.

Phase 6: End of active life. While you can skip one or more of the previous phases, going through the end of active life is almost inevitable. Your mobility may be affected, and you may need help managing daily activities.

Even if you’ve prepared the necessary estate planning and financial documents, you must still come to terms with the fact that your time on earth is limited. The death of a spouse or a terminal health diagnosis are shocks you may need to bear. Major life changes can include moving closer to children or to a continuing care retirement facility.

I’ve been lucky so far. The future, however, is impossible to predict—and no doubt many challenges lie ahead.

Sundar Mohan Rao retired after a four-decade career as a research and development engineer. He lives in Tampa in a 55-plus community. Mohan's interests include investing, digital painting, reading, writing and gardening. Check out his earlier articles.

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Having the Last Word

IT WAS 1982 OR thereabouts. After attempting to be a landlord for several years, I decided it wasn’t for me. I sold the house and the four-family apartment building I’d been managing.

The final task in closing out this adventure would come at tax time. Keeping the books was the one aspect of being a landlord that I didn’t mind. I understood how accumulated appreciation would be recaptured and how capital gains tax would affect that year’s taxes.

Off to Sam the CPA I went, with my carefully prepared handwritten ledger of debits and credits. After a few anxious weeks, I finally received a call from Nancy, Sam’s administrative person. Great. My taxes were finished and ready for pick up.

Whoa, my balance due was $1,000 more than I’d calculated. In 1982, that was a formidable amount of money. As I reviewed the return, however, I realized Sam had made an error. My crude number-crunching turned out to be correct. This was the moment I learned an inconvenient truth about the tax prep business.

Most CPAs are up to their eyebrows in tax returns more complex than the Form 1040. The preparation of simple individual tax returns is often completed by an assistant or less experienced seasonal worker, whose work often isn’t even reviewed by the CPA.

What the heck? I was paying for Sam the CPA to do my taxes, not his secretary. That’s when I decided that I didn’t have to pay someone to screw up my taxes when I could mess them up myself for free. Twenty years later, Dan’s Tax Prep was born. But that’s not what I’m here to talk about today.

We last updated our wills seven years ago, after Chris and I got married. Marriage introduced new complexity to our estate plan, especially regarding beneficiaries. The attorney we hired interviewed us to understand our intentions and to offer suggestions.

One of our ideas was to file a transfer-on-death affidavit with the county to keep the house out of the probate court. Our attorney thought that naming two unrelated families—mine and Chris’s—on the affidavit could lead to differences of opinion when the time came to sell the house.

On the one hand, that made sense to us. On the other hand, it went against our desire to avoid probate. Still, we decided to take the counselor’s advice and not file the affidavit.

When we received a draft of our new wills for review, they were riddled with typographical errors affecting our names, address and other contact information. The meat of the wills was fine, which led me to a couple of conclusions.

First, a careless employee using a boilerplate software program prepared the documents. Second, it was never reviewed by the attorney. Sound familiar?

We recently moved into a new home. I brought up the idea of revisiting the transfer-on-death affidavit. Chris suggested that we file the affidavit naming only my daughters as the beneficiaries, thus avoiding the problem of unrelated parties fighting over the house’s sale.

Keeping in mind the lackluster job done by the attorney seven years earlier, and the fact that I’m pretty darned good at filling out forms, I researched the process involved with filing an affidavit. It didn’t look difficult. I purchased WillMaker software, which includes the transfer-on-death real estate affidavit tailored to Ohio.

I simply followed the prompts in the program. I had to make a trip to the county recorder to obtain a copy of my deed, along with a reference to the prior deed on the property. With the finished affidavit in hand, I made another trip to the county where it was reviewed and filed.

Now, all of our financial accounts and the house will pass to our beneficiaries via payable-on-death or transfer-on-death affidavits. All that’s really disposed of by our wills is the stuff inside our home. I suspect some of our stuff will be taken by the kids and some donated to those in need. I have every reason to believe that this will be accomplished without conflict and without the need to involve the probate court.

With the filing of the affidavit, however, the house will not pass via our wills. This means that our wills need to be updated again. Since there’s not much in the wills, I’m taking a stab at them as well.

I’m using the WillMaker program to complete our updated wills. I carefully compared the new wills with the old ones, and found all of the elements of each to be in agreement. The software allowed us to divide the property into unequal shares, to name each grandkid in case their mother has passed, and to name a custodian for any minor children.

In addition to documents like health care directives and powers of attorney, the software also has a template for letters to survivors. I’m enjoying writing mine. My hope is to leave ‘em laughing.

I probably wouldn’t have attempted this project if the software didn’t come with a money-back guarantee, but it seems to work well. I do have the added advantage of having a son-in-law who worked as an estate attorney in Ohio before taking a job with his alma mater in Indiana. He’ll grade my homework.

How did the review by my son-in-law work out? He caught a glaring error that could have affected my well-laid plans. When my oldest daughter married 22 years ago, she kept the name Smith. After 22 years, and with everyone referring to her by her husband’s surname, that little factoid was so far back in my mind that I never thought about it.

I've corrected our wills. I'll also need to fix the error on our account beneficiary designations, as well as the real-estate affidavit I filed with the county. Everything else was in order. But it illustrates the importance of having a professional examine your will and similar documents.

For 30 years, Dan Smith was a driver-salesman and local union representative, before building a successful income-tax practice in Toledo, Ohio. He retired in 2022. Dan has two beautiful daughters, two loving sons-in-law and seven grandchildren. He and Chris, the love of his life, have been together for two great decades and counting. Check out Dan's earlier articles.

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In Love With Bonds

WHEN I WAS GROWING up, I’d receive Series E savings bonds as birthday gifts from my parents. It was the start of many to come. My parents had great respect for savings bonds and, as I got older, I came to hold them in high regard as well.

Savings bonds never offered the highest interest rate. At a defense plant where I worked, a guy in the accounting department questioned my bond buying. He noted that savings bonds paid less interest than the certificates of deposit then available. I just shrugged my shoulders.

I know why I kept buying the bonds. They were something I was familiar with since childhood, plus it was an easy way to invest. When I began working full-time, I purchased savings bonds through payroll deduction. The deductions were automatic, so the money was gone before I could spend it.

In 1976, when I got married for the first time, the guests—who were our college friends—all gave us savings bonds. When I signed up for the U.S. Coast Guard’s Officer Candidate School in 1978, we were able to buy bonds through payroll deduction. I did.

When my current wife and I got married in 1987, once again our friends gave us savings bonds. And I continued buying them through payroll deduction for many more years. That ended when my employer introduced a 401(k) savings plan, and I switched my payroll deductions to buying mutual funds through the 401(k) instead.

But I held onto the savings bonds I’d acquired. They continued to earn interest for 30 years, and I typically only cashed them in when they matured.

On top of that, my mother kept buying savings bonds for my brother and me, as well as for her grandkids and great-grandkids. When my mother gave me all of my bonds, I stored them in a safe-deposit box at the bank until they matured.

In 2004, I converted some of my Series E bonds to HH bonds. These had a maturity of only 20 years, but—if you converted—it postponed the tax bill on matured Series E bonds for those two decades. HH bonds paid 1.5% in annual interest for 20 years. Coming into 2024, I still owned those HH bonds, which all finally mature this year.

When Series I bonds were introduced, I was hesitant. I was used to earning a fixed rate on my savings bonds. I bonds were different, offering a fixed rate and a variable rate. The variable rate reflects inflation, while the fixed rate represents the gain over and above inflation. I purchased Series I bonds rather than EE bonds when the fixed rate on I bonds was at least 1%.

My love affair with savings bonds has mostly come to a close. Buying a financial instrument with a 30-year maturity seems silly at my age.

Still, I continue to own many savings bonds. I hold them as dry powder should I ever need money. They’ve never been the vehicle that more sophisticated investors use. Yet, when banks were paying close to 0% interest after 2008’s Great Financial Crisis, my Series E bonds were still paying 4%. It made me feel good that this stodgy relic from the past was outshining other savings options.

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