Jonathan Clements's Blog, page 77

Who’s Watching You?

WHEN I ATTENDED Sunday school as a child, I was taught that God is always watching over me. It was a frightening notion, but one I grew accustomed to. My mother would often remind me to "watch your Ps and Qs," though I wasn't entirely sure what that meant. Nonetheless, I understood the importance of behaving properly.

Today, it seems we have a different form of surveillance. As George Orwell so aptly depicted in his book 1984 , Big Brother is watching. The idea of living in a society where every action and word are monitored by a controlling authority is unsettling. Yet, here we are, under the watchful eye of technology companies.

During childhood, most of us had parents who kept a watchful eye on us. Ideally, they were loving and attentive, looking out for our best interests. But perfection is rare. Many parents are flawed, simply because they’re human. Successful children learn to navigate these imperfections, avoiding pitfalls that could arise from saying or doing the wrong thing at the wrong time. Survival and prosperity often depend on mastering this imperfect world.

Our modern-day big brothers monitor our every action we take with our devices, whether it's our smartphones, electric cars, e-readers or laptops. We're constantly under observation, with the primary intention of selling us something. But do we want what they're selling? Often not. If we did, we'd buy it without the need for persuasion.

Just like traditional salespeople, these electronic counterparts refuse to take "no" for an answer. They relentlessly push products based on our past behavior, assuming that's all we'll ever want. It's frustrating, akin to walking into a library and being confined to one section each time.

So, what can we do? We must recognize the game that’s being played. It's a game where they claim to know our desires better than we do ourselves. But we still have the freedom to choose. Awareness is key. We must remember that we can resist these subtle nudges, and exercise our right to say "no."

For some, especially spenders, this game is a boon, offering endless opportunities to acquire new possessions. But for others, like me, it's irrelevant. We only purchase what we truly need or desire, regardless of external influence.

I worked with a guy who announced to me on Friday that he was going to look at Chevrolets over the weekend. I wished him luck. Come Monday, I asked him if he looked at those Chevy cars.

He said, “Yes and I bought a Pontiac.”

“I thought you wanted a Chevy,” I said.

“I did, but the salesman showed me the Pontiac, so I bought it.”

“When are you going to pick it up?” I asked.

“I picked it up that day.”

Talk about a good salesperson.

Many people, who intend to buy one item, can be persuaded to buy something else by a good salesperson. That’s nothing new. But being nudged into buying something subliminally is all part of this new digital game. To win, you need to know the rules.

Temptation has been with us from the get-go. Having the willpower to resist is a practiced skill. Knowing these forces are going to test our willpower requires awareness. Understanding what’s happening will help us say “no” when “no” is the right answer.

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Look Both Ways

MICHAEL BURRY IS a hedge fund manager who gained fame betting against the housing market in 2008. When that market collapsed, Burry made a fortune, and that cemented his reputation as a market seer. Burry was later portrayed as the central character in Michael Lewis’s The Big Short.

But in the years since, Burry’s predictions haven’t turned out as well. Five years ago, he spooked index-fund investors when he argued that they might have trouble accessing their funds. “The theater keeps getting more crowded,” he said, “but the exit door is the same as it always was.” That scenario never materialized.

Over the years, Burry has issued other warnings. During the 2022 downturn, he predicted that things could turn out “worse than 2008.” In early 2023, he summed up his thoughts in one word: sell. The market’s gone much higher since those warnings.

I don’t mean to focus only on Burry. Few investment prognosticators have reliable track records. But this presents a conundrum: We know that we can’t make predictions of any precision and yet, in formulating our financial plans, we need to make some assumptions about the future.

To do that, our only and best guide is to consult historical data, even if we know that the roadmap provided is necessarily imperfect. That’s why, as we begin the new year, I think it’s worth examining some of today’s key trends and thinking about where they might lead. We can look at two areas in particular where there’s considerable debate.

The main question investors are asking today: What should we make of the U.S. stock market? By virtually every measure, it’s expensive. Over the past 15 years, the S&P 500 has returned an average 14% a year, far above its 10% long-term average. As a result, the market’s price-to-earnings (P/E) ratio, based on estimated earnings, now stands at more than 21, significantly above its long-term average of about 16. According to another popular P/E measure known as the CAPE ratio, stocks today are more expensive than at any point in history other than 1929 and 2000. A projection by Clearnomics, based on today’s market’s P/E ratio, implies that stocks will lose an average 1.5% a year over the next decade.

By contrast, virtually every market outside the U.S. looks like a bargain. International stocks have significantly trailed their peers in the U.S. As a group, the P/E ratio of stocks outside the U.S. is just 13. To some, the conclusion is clear: Rational investors ought to shift their holdings toward these cheaper international markets. If these valuation figures are worth anything at all, it would be unwise to be complacent about the U.S. market.

That’s one point of view—but not everyone agrees. According to one very reasonable analysis, there’s good reason for domestic stocks to be so expensive. In short, it’s because the technology companies that dominate the domestic market are far larger and far more profitable than their international peers. It’s become a bit of a cliche to talk about the Magnificent Seven stocks that lead the U.S. market—Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta and Tesla—but the fact is that most other countries don’t have even one company that’s in the same league as these seven.

Another factor that could justify the U.S. market’s lofty valuation: As a recent writeup points out, many economies outside the U.S. have been ailing more or less continuously since the 2008 financial crisis. Many countries in the European Union have struggled with sovereign debt issues and with stubbornly slow growth. These issues may be structural rather than temporary. Recall, for example, the violent protests in France a few years back when the government proposed shifting the retirement age from 62 to 64. For better or worse, attitudes toward work differ from country to country, and ultimately that flows through to corporate profits and thus to stock prices.

Which way will things go? Without the benefit of hindsight, no one can say. But as investors, it’s critical to be aware of—and to keep an eye on—this question.

A second, related question has to do with economic growth. Population growth is a key driver of growth because, in simple terms, a growing population provides a larger base of consumers. That allows companies to increase their sales and profits. But population growth in the U.S. has been on a troubling downward trend for decades.

Today’s population is growing at about half the rate it was 30 years ago. This trend is by no means limited to the U.S. If it continues, growth may be slower around the world, and it stands to reason that this could translate into lower stock market returns. It would also have other negative effects. For example, with fewer working-age taxpayers, government budgets could be strained, as would the Social Security system.

But again, this isn’t a foregone conclusion. In the 1990s, worker productivity boomed, a result of the internet’s widespread adoption. That led to rising wages, rising share prices and a vastly improved federal budget situation. In 2000, the government actually ran a surplus, albeit briefly.

Could something similar happen today? There’s some initial evidence that artificial intelligence has started to contribute to an uptick in worker productivity. This could be enormously valuable, because productivity improvements allow companies to increase profits, giving them the option to raise wages or to reinvest in their businesses. Either way, it would have a positive effect on the economy and on stock prices.

It will take some time to know how real this is and whether it’ll continue. But this too is a trend that’s worth keeping an eye on. If the second half of the 2020s ends up looking like the second half of the 1990s, the positive implications could be significant.

I’ll acknowledge that I may have raised more questions than answers, so where does this leave us? In a recent report, Cliff Asness, founder of AQR Capital, took a lighthearted approach to the question. His report was titled “2035: An Allocator Looks Back Over the Last 10 Years.”

In other words, it’s written from the perspective of an investor looking back over the 10-year period starting today. He reviews each asset class, from stocks to bonds to private equity and cryptocurrency. His conclusion: Markets change, but human nature doesn’t. His prescription: We should be wary of complacency, wary of storytellers and especially wary of any argument suggesting that “this time it’s different.”

What does this mean for investors? The key, I think, is to strike a balance in our thinking. Yes, markets can and do change. But we should also stay grounded, remaining mindful of basic economic rules that don’t necessarily change. Perhaps the most important thing is to ask whether our finances are organized such that we could withstand whatever outcome the market delivers.

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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Spending It

RETIREES ENDLESSLY debate how best to draw down their retirement savings, and yet it all comes down to two simple rules: Don’t spend too much each year, and don’t sell stocks during down markets.

How do we put these two rules into action? Retirees can pick from a host of withdrawal strategies, including the five popular choices listed below. You’d likely fare just fine with any of the five strategies—but that doesn’t mean you shouldn’t pick carefully.

1. Four percent rule. This rule specifies that retirees should spend 4% of their nest egg’s value in the first year of retirement, thereafter stepping up the annual sum withdrawn with inflation. History suggests that, with this approach, retirees shouldn’t run out of money over a 30-year retirement.

To avoid selling stocks during rough markets, it’s important to have at least enough in conservative investments to cover five years of portfolio withdrawals. For extra safety, some folks might want to hold seven or even 10 years’ worth.

2. Fixed withdrawal rate. Instead of the 4% rule, I’ve suggested in the past that retirees opt for perhaps a 5% withdrawal rate, and then each year withdraw that percentage of their portfolio’s beginning-of-year value.

This approach has two benefits. First, our spending is tied directly to our portfolio’s performance, and we could potentially spend more if the financial markets have great returns. Second, we’d never run out of money, because we’re always withdrawing a fixed percentage of whatever remains.

3. Required minimum distributions. Government-mandated withdrawals from retirement accounts involve drawing a rising percentage from these accounts each year as you advance through retirement and your life expectancy shortens.

Experts have suggested that retirees take these withdrawal percentages and apply them to their entire portfolio, including both retirement-account and taxable-account money. The IRS has a variety of tables for required minimum distributions. Those intrigued by this strategy should probably use the so-called uniform lifetime table.

4. Emptying buckets. There’s no universally agreed-upon bucket strategy, but the notion is that retirees employ perhaps three buckets of varying investment riskiness. These might include a low-risk bucket to cover spending over the next five years, a medium-risk bucket holding another five years of spending money, and a high-risk bucket that’s mostly invested in stocks.

As the low-risk bucket empties, retirees might refill it using dividends, interest and investment sales from the other two buckets. Many find the strategy comforting, because it offers the reassurance that spending money for the years ahead isn’t at risk of being devoured by a stock-market crash.

5. Setting a floor. How much do you spend each month on fixed living costs, such as housing, insurance premiums, utilities, groceries and so on? Between Social Security, dividends, interest, annuity income and any pension, you might aim to have enough regular income to cover at least these fixed costs, so a stock market crash wouldn't derail your ability to pay the bills.

What about discretionary expenses, such as eating out, gifts to family and travel? For these costs, retirees could arrange even more regular monthly income. Alternatively, we might have a separate pool of money that’s invested more aggressively and hence offers the chance for growth. This will offer longer-term inflation-protection, though it also means we may need to trim discretionary spending during bad financial markets.

Which of the above strategies should folks favor? Each will give you slightly different annual income. Still, don’t assume the strategy generating the most spending money is necessarily the best.

Remember, the five withdrawal strategies are all layered on top of a retiree’s basic mix of stocks, bonds, cash and other investments. To be sure, we might tweak that investment mix to fit better with our chosen withdrawal strategy. Still, if we opt for a higher allocation to stocks, we’ll likely enjoy some combination of greater annual income and larger portfolio values over the course of our retirement, no matter which withdrawal strategy we use.

So, how should we pick among the various withdrawal strategies? I’d view them as behavioral aids, helping retirees to figure out how much they can spend each year and making it easier to cope with wild financial markets.

Think of these strategies as similar to dollar-cost averaging. While dollar averaging comes with some mathematical justification, it’s really a behavioral prop, making it emotionally easier for folks to buy into the stock market. There’s nothing wrong with that. But we shouldn’t kid ourselves: Folks may tout dollar-cost averaging as a superior way to invest, but it’s mostly about supplying the discipline we need.

Ditto for the withdrawal strategies outlined above. They’re just devices for taking the portfolio we have and generating income in a way we find emotionally palatable. Which strategy do you find most appealing? That’s probably the right one for you.

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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Rent Forever?

STOCKS, BONDS, CASH—and a house owned free and clear. For many, that’s the recipe for a financially successful retirement. Our homes represent a central pillar of middle-class status. With a paid-off mortgage, we have an affordable place to spend our old age.

Yet signing up for decades of house payments has become controversial for its high opportunity cost—what you give up to pay the mortgage. Has a home mortgage, with its long, slow road to payoff, fallen from relevance as a central element of retirement planning?

To be sure, it's been a wild ride. During the George W. Bush administration, well-intentioned federal policies encouraged an expansion of the market for home loans. Bankers and builders responded. Home values rose as lending standards declined and increased demand met limited supply.

Rising home prices served as their own collateral. Borrowers with no cash found zero-down offers containing both a primary and secondary mortgage. The second note, called a piggyback loan, filled the role of a down payment. “No doc” loans replaced earlier underwriting requirements that stipulated borrowers must verify they had income sufficient to support mortgage payments.

These riskier loans were bundled and sliced into collateralized debt obligation (CDO) tranches, considered less risky than individual mortgages since the risk of default was diluted across many loans. These marketable securities also shifted the financial risks of lending away from mortgage originators and onto holders of the CDOs.

This created novel moral hazard for multiple parties, who weren’t subject to the risks they ran. Questionable gain-seeking behavior resulted, such as bankers churning out CDOs to inflate year-end bonuses. Ratings agencies compounded the risk miscalculation by labeling these toxic instruments as investment grade. Out of this came the Great Recession.

In the subsequent global reckoning, the plummeting value of toxic assets cut a path of destruction through the world economy. Many people lost their homes to foreclosure. Financial firms holding mortgages became insolvent, triggering a global liquidity crisis.

Housing prices dropped, in some markets by as much as 50%. Even traditional borrowers, many of whom had put tens of thousands down and made years of payments, found themselves owing more than their homes’ worth.

Some homeowners simply walked away, refusing to pay their mortgage. Others exited their housing debt with short sales—selling for less than they owed—which further exacerbated the crisis. Banks holding mortgages and collateralized debt obligations were endangered.

Many of my students at the time held underwater mortgages and wondered how to respond. Was it ethical to walk away?

Once burned, twice shy. Some now argue for an alternative lifestyle of renting forever. They want to find means, other than homeownership, to save for retirement and achieve financial prosperity. Still, nearly two-thirds of U.S. households remain homeowners.

With the high costs of everyday life, homeowners can be tempted to borrow against the equity in their homes, even when it means their mortgages may never be repaid. With high interest rates, the high initial cost of homes, and ready options for cash-out refinancing, why should a paid-off home remain a primary financial goal?

Perhaps it's foolish to place such importance on owning a home. Questioning homeownership is common ground for young adults and retirees alike. Uncertainties increased in a post-inflationary era where home values have lately trailed inflation. Factor in the cost of property maintenance and the stress of servicing a mortgage, and homeownership can look unappealing.

Could the housing price boom be over? In some places lately, the interest rate on no-risk cash deposits has been higher than the annual increase in home values. People with working-class paychecks or living on retirement incomes are already stretched thin covering the costs of housing, food and transportation.

A mortgage can push aside many of life’s smaller pleasures. If that’s the case, why not opt for the smallest, cheapest housing possible?

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

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Playing Ball

MY SON IS A FRESHMAN in high school, and I’m beginning to be more purposeful about his baseball aspirations. But after dropping $85 on a one-hour pitching lesson, I was wondering, was my money well spent?

My search for an answer began with the Netflix series Receiver. I tuned in to see football player George Kittle, a former University of Iowa Hawkeye and bigtime professional wrestling fan. Kittle was kind enough to send autographed memorabilia for a softball fundraiser we had a few years ago. He’s now a star for the San Francisco 49ers.

I learned about Kittle through a mutual friend, Steve Manders, who was a walk-on for the Hawkeyes for three years before he began professional wrestling. During my wrestling career, I tagged with Steve for a period of time, and learned a lot about hard work, grit and perseverance from being around him.

While I watched Receiver to learn more about Kittle, the Netflix series was also my introduction to Detroit Lions wide receiver Amon-Ra St. Brown. What caught my eye was his dad, John Brown, a former Mr. Universe. I subsequently listened to the father’s podcast and interviews. It became clear he had strong opinions about parenting, including how parents need to take charge of the direction of their children's lives.

It was eye-opening. I always like to have my beliefs questioned. And when someone has results, I’ll listen with an open mind. And oh my, does the older Brown have opinions:

“If your kid’s not doing something, it’s the parents’ fault, it’s not the kid’s fault.”
“I raised my boys to dominate. We’re not having fun. We’re not competing. We're here to dominate.”
“No coach can prepare you to be the top in the world. They don't have the time. They have 30 kids, 40 kids on the team. You need personal trainers. That costs a lot of money. Well, that’s where you come in. That’s mom and dad.”

I remember hearing World Wrestling Entertainment (WWE) Hall of Fame broadcaster Jim Ross speak. He said that, if all you do is the standard amount of practice or work, you're going to get the standard amount of success. When I heard that, I immediately thought of my formative years in wrestling, when I was attending wrestling school in Dallas.

Alex Pourteau was the guy who got into the ring and trained with us. He showed us physically how to do the moves and execute them. One day, a male stripper came in and trained with us. He wasn’t part of our class. But he worked out with us and, when he walked out the door, he handed Alex some money and said, “Thank you, brother.”

I thought nothing of that moment until I heard Jim Ross’s speech. We only went to wrestling school on Wednesday for an hour or two. I did the minimum. I was struggling to gain traction, to get my first match. I was stuck and couldn't think of a way to get better. After hearing Ross speak, it was crystal clear how I could have improved, how I could have gotten in more practice.

I could have taken an extra $50 or $75, and asked Pourteau if we could train on Monday and Thursday evening as well. Just me and him. Money was tight, but I could have got a second job and come up with the extra cash.

Pourteau was signed by the WWE a few years later and was an excellent young wrestler. I would have improved immensely by working out with him one-on-one. But my mind wasn't there at that time, it didn't get creative when it ran into obstacles. I was struggling. It was the first time in my life I was pursuing something that I really cared about but where I wasn't succeeding. I didn’t know how to handle that.

As I’ve spoken to other parents about the price of travel baseball, clinics and lessons, all I get is a shrug of the shoulders—an attitude that it’s the price to be paid if you want to support your kids. When folks ask me how I handle the bad tenants who inevitably come along and trash a unit or don’t pay their rent, I give them the same look I get from these parents. It’s the cost of doing business. It can’t be escaped and it’ll happen at some point, no matter what precautions you take.

Many parents say that, if you travel any distance for a game, you're easily looking at several hundred dollars for a weekend once you factor in gas, meals, hotels and tournament fees. It’s understandable why they have little sympathy for me and the $85 I spent on a quality one-on-one session with a Triple-A baseball pitcher, one who played for four years at a Division 1 college. It’s the price you pay for excellent coaching.

And besides the technical skills my son learned, how much access does a typical high school freshman get to a world-class athlete? What are the intangibles that kids get from spending time with those who have worked hard at their craft, excelled in a difficult endeavor and graduated with a degree from a first-class university? My son’s trainer is a great young man: positive, encouraging, a tremendous work ethic and well mannered. My son has played with a few players who were the opposite: arrogant, not helpful to the young guys, lazy and entitled.

I’ve been around some of the greats in pro wrestling, along with many other wrestling pros. I’ve come to learn that these interactions provide valuable lessons.

So, I’ll continue to spend money on my son’s baseball lessons. I’m going to keep listening to John Brown and his message of tough love: “There’s no such thing as lazy kids, only lazy parents.” There are moments when I’m listening to him that it feels like he’s talking directly to me and the lazy parenting I’ve been guilty of in the past.

I often simply dropped off my son at practice, and expected the coach to transform my son and his teammates into solid ball players. But that’s a lot to ask from one or two coaches. Now, I’m doing what I can, such as hitting the weights with him, cooking better meals, and getting in extra reps on the weekends at the batting cages and ball diamonds. And opening up the wallet as well.

Juan Fourneau’s goal is to retire at age 55. When he isn't at his manufacturing job, he enjoys reading and writing about personal finance, investing and other interests. Juan, who is married with two children, retired from the ring after wrestling on the independent circuit for more than 25 years. He wrestled as a Mexican Luchador under the name Latin Thunder . Follow Juan on Twitter @LatinThunder1, visit his website and check out his previous articles.

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Kicking Myself

THERE ARE TWO TYPES of mistake I make: those that are unintentional and those where I should have known what would happen.

After an unintentional mistake, I’m perplexed by what went wrong. I might say to myself “I’ll never do that again” or perhaps “what the heck just happened?” These are genuine mistakes, and I try to learn from them.

By contrast, stupid mistakes are those that I should have known would occur. No matter how many college degrees we have or how many years on the job, we all make stupid mistakes. What counts as a stupid mistake? We know we’re doing something wrong, and yet we still go ahead. A stupid mistake happens when we don’t pay enough attention to what we’re doing.

When I take a cookie sheet out of a hot oven without bothering to put on oven mitts, that’s a stupid mistake. I might grab the tray one-handed using a dish towel. Too often the result is singed fingers on my ungloved hand.

Another example of a stupid mistake—which fortunately hasn’t happened to me—is glancing down at a text on your cellphone while driving. The scenery changes pretty fast at 60 mph. In an instant, you can be in trouble.

An error that I make regularly is forgetting to save all documents before shutting down my computer. I should know better by now. Forgetting my wedding anniversary is another stupid mistake. After all, it falls on the same date every year.

To be sure, intentionally doing something that results in a less-than-satisfactory outcome isn’t always a stupid mistake. For instance, making an investment decision that doesn’t work out can be classified as risk-taking, not stupidity. We knew it might not work in our favor, but we decided to “take a chance” in the hope of a gain. Those are deliberate decisions with unfavorable outcomes, not stupid mistakes.

For me, it’s the stupid mistakes that prompt the most self-criticism. Like assembling Ikea furniture without reading the directions, and then realizing I’ve installed the wrong length screws at step No. 2.

If you’re distracted and not “in the moment,” it’s easy to make a careless error. That’s why Thomas J. Watson, the man behind IBM, hung signs that proclaimed “THINK” throughout the workplace. In a talk to employees, Watson said, “The trouble with every one of us is that we don’t think enough,” according to an IBM history. Watson also said, “‘I didn’t think’ has cost the world millions of dollars.” It’s in those moments when the “think” light goes off that the the stupid mistakes get made.

We bring these moments on ourselves. We’re rushing through a project or we start thinking about something else. To repeat a phrase I heard many times during my education, “Give me your undivided attention.” If we do that, the results are likely to be far better.

Attitude of Gratitude

I'M A FIRM BELIEVER in counting my blessings. I didn’t always feel this way. When I was younger, I was hung up on what I didn’t have. It wasn’t money that I lacked, but all the important things of youth that help boost self-esteem.

Once I began to count my blessings, I felt more successful. I was still aware of my failures, but I also saw my wins more clearly.

I describe this approach to life as an “attitude of gratitude.” The more time I spend thinking about what’s going well, the less my failures bother me. It gives me the strength to overcome my problems.

If I do focus on my problems, I try to remember how I’ve successfully faced similar obstacles in the past. That makes me feel certain I can overcome my current woes.

When I was a Dale Carnegie instructor, each member of my class would give a two-minute talk. At the end, instructors were required to make a positive comment. If we couldn’t, we were told that was the instructor’s fault, not a student’s shortcoming.

I developed a trick to find positive things to say. As I started the class’s applause and began to walk to the front of the room, I’d ask myself, “Why did I like what I just heard?” That set my mind toward praise. It always worked. I was never at a loss for words.

I do the same thing now over my morning coffee. What did I like about the previous day? Sometimes the blessings I recall are major. More often, they’re minor. That’s okay. The longer my list of blessings, the happier I feel.

We all experience hardship. We all have failures. Try not to dwell on them. Pain lies in that direction. If I stumble, I try to remember how I’ve overcome similar obstacles before and the many successes I’ve enjoyed.

Anyone can count their blessings. The trick is to remember all the good things in our life. The more blessings we can count, the happier we become.

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

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Self Defense

ONE SPRING DAY IN 2022, an elderly woman entered Paris’s Picasso Museum to see a new exhibit. Among the items on display was a decorative blue jacket, which was positioned on a wall next to a portrait of Picasso.

The woman liked the look of the jacket, so she took it down from its hook, put it in her bag and quietly walked out the front door. Only later did the museum discover the theft, which was made even more embarrassing by the fact that it had been robbed several years earlier and had—so it thought—upgraded its security.

What lesson might we draw from this odd event?

Some might see it as a reminder that the world is full of risks, and that risk can materialize when and where we least expect it. If even a well-guarded museum can be outsmarted so easily, then maybe we all need to look for ways to harden our financial defenses. That would be one conclusion.

Another, perhaps opposite, conclusion would be to acknowledge that the risks present in the world today are actually too numerous and too varied for any of us to adequately guard against. In light of that reality, maybe the rational thing to do is to worry less. In other words, we shouldn’t spend our days trying to harden our defenses, since it’s an illusion to think that we could ever really succeed.

Another reasonable way to look at the museum theft would be to recognize it as an outlier. Since the risk of oddball incidents like this is so small, we really shouldn’t let it affect our thinking one way or the other. Oddball events shouldn’t cause us to spend our days battening down the hatches and, at the same time, they shouldn’t lead us to simply throw caution to the wind. We shouldn’t draw any conclusion from them.

Instead, we should put risks like this in the same category as other extreme events, like earthquakes or volcanic eruptions. Yes, we can acknowledge that they carry non-zero probabilities, but also recognize that they’re so rare that it doesn’t make sense to factor them into our thinking.

Which of these approaches to risk management makes the most sense? I’m not sure there’s an easy answer. That’s because risk management, in my view, is one of the toughest concepts in personal finance. For example, a recent article in The Wall Street Journal was titled “Even Rich Retirees Fear Outliving Their Money.” It describes a paradox that economists refer to as the “consumption puzzle.” Studies have found that retirees are happier when they spend more, and yet—on average—retirees appear to spend much less than they could afford to.

The article references a new paper in which retirement researcher David Blanchett quantifies this phenomenon. Using the 4% rule as a benchmark for a reasonable portfolio spending rate, Blanchett found that retirees spend, on average, just 2.1%. The upshot: They could afford to double their spending without materially jeopardizing their plans.

Why are these folks spending so little—and why, on the other hand, do some people spend so much more than they can afford? My guess is it’s because risk is intangible and it’s complicated. It takes many forms and, as a result, it’s hard to quantify and thus hard to manage. The result: When we ponder risk, we tend to lean on emotion, instinct or rules of thumb. But there is, I think, a better way.

When I was in grade school, I had a friend named Gene. He was first-generation American, his parents having come from Italy. One summer, his parents let me tag along when they traveled back to Italy to see family. Two observations from that summer have stuck with me and, over the years, have formed the basis for how I think about risk. Let’s look at each in turn.

Gene’s family lived in a small mountainside town, but before we could make our way up there, we stayed for a night with a cousin who lived in downtown Naples. Especially then, Naples was known for its tougher neighborhoods, which I learned when our host locked up for the night. First came the usual chain and dead bolt. Then, from the opposite wall, he lowered a metal bar, which he wedged up against the front door to form a sort of barricade. Finally, he pulled down a bar from another wall and wedged that into place against the door as well.

Was this fellow a worrywart? I don’t think so. My sense is that he simply knew his neighborhood and was being rational. That provides us with the first pillar of risk management, which is to recognize that risk is personal—that we all face different risks. For Gene’s cousin, personal safety was most important, and so that’s where he focused his efforts. For others, risk takes different forms. The key is to assess the risks that might be most relevant to you and then to load up on protection in those areas.

In many cases, that protection will take the form of insurance. If you’re a young parent, life insurance is likely the highest priority, and my advice is to err on the side of over-insuring. Similarly, if you rely on a single income, it’s vital to carry disability coverage, expensive as it is. What if you serve on corporate or nonprofit boards? Be sure you’re covered by directors and officers insurance. If you have a Porsche or a pool—or teenage boys, as in my case—you might consider extra umbrella coverage. But these are just examples. The most important thing is to avoid generic approaches, and instead to identify and manage the things that pose the greatest risk to you.

What’s the second ingredient for managing risk? Later that summer with Gene’s family, we went on a day trip with another relative. What I noticed was that the driver initially wasn’t wearing a seatbelt. But as soon as she got on the highway, she buckled up and made sure everyone else did too. I didn’t ask questions, but my guess is she did that because she perceived the highway as being more dangerous. In fairness, that was a long time ago, but data show that this risk assessment was inaccurate. City streets actually pose a greater risk. That brings us to the second key pillar in risk management.

When deciding which risks to protect against, it’s important first to have a clear picture of those risks. To be sure, this isn’t always easy. Indeed, insurance companies have departments full of actuaries, and even they sometimes make mistakes. The key, though, is to avoid intuition, and instead to look objectively and think systematically.

As we move into the new year, my recommendation for financial housekeeping would be to conduct an assessment of the risks that might matter most to you. Could you afford to loosen your belt in some areas? Is some tightening in order? Is there anything you’re overlooking? Like changing the batteries in your smoke detector, a risk audit like this is worth a periodic review.

And what about the Picasso Museum? It lucked out. About a week after the theft, the same elderly woman walked back through the doors. It turns out that her memory was slipping, and she didn’t realize what she had done. Police were able to locate the coat at her home, and she had no problem returning it. The only issue: She’d found it too big and during the time that she’d borrowed it, she had it tailored.

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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Why We Struggle

I'VE SPENT MUCH OF MY life trying to better understand the world, especially the financial world. But I wonder whether I should have spent more of that time trying to better understand myself.

Why do some financial situations scare us, while others leave us unperturbed? Why do we spend time and money in ways we later regret? Why do we find our bad habits so difficult to change? Why do we admire some folks, while being jealous of others?

These questions are better directed to a psychologist than some aging, ink-stained wretch. Still, it’s questions like these that have fascinated me in recent years. I can’t claim to have the answers—but I have some sense for why they’re difficult to answer.

It takes years to know ourselves. It’s embarrassing to think back on the self-confidence of my 20-something self. I was so sure I knew what I wanted and that my way was the right one.

The decades that followed have highlighted how wrong I was. For instance, my instinct is to assume that others have good intentions. While that’s usually the case, it isn’t always. One consequence: I’ve occasionally been taken advantage of by folks I considered friends. Fortunately, while the emotional toll has sometimes been large, the financial cost has been modest.

But perhaps the big danger isn’t the personality traits about which we have some inkling, but rather aspects of our personality that we’re completely clueless about. Others might be able to fill us in on our shortcomings—if we’re humble enough to let them.

So much of who we are is innate, and much of the rest reflects early life experiences. There’s plenty of advice on what we can do to boost our happiness. But even if we followed all this advice, the impact would likely be modest. Why? We all have a happiness set point—an innate predisposition to be more or less happy—and that has a far bigger impact on whether we tend to be happy or not.

Layered on top of our innate personality traits are our life experiences, especially those from early in our lives. In my 20s, when I was raising two children on a junior reporter’s salary and money was in short supply, I remember my panic whenever I was faced with a car or home repair bill. Today, I can easily handle such bills, and yet a major expense can still bring back memories of those panicked moments from four decades ago.

We’re bad at figuring out what will make us happy. Why do we often waste money on things that bring us little happiness? Why are our closets and basements full of possessions we regret buying?  We think we know what will make us happy, and yet we’re frequently wrong. My hunch: We go astray because we often spend money based on the influence of others, both past and present.

Bad habits are extraordinarily hard to break. It’s said that good and bad habits compound, and I believe it. My good habits—the discipline to exercise every day and to block out distractions so I can focus on the work I need to get done—have become so much a part of me that I can’t imagine changing.

What about my bad habits? That’s another matter entirely. For instance, at a restaurant, I’ll order an entrée simply because it comes with French fries, even if there’s another entrée I prefer—and even though I know I shouldn’t be eating fries. I’m especially susceptible to ordering the wrong thing if I’ve had a rough day and my “willpower budget” is at a low ebb. The good news: At home, Elaine largely dictates what we eat, and her inclinations are far healthier than mine.

Of course, eating isn’t our only outlet if we’re at a low ebb. Plenty of folks find other damaging ways to cheer themselves up, whether it’s spending too much, having a few drinks, buying lottery tickets or even making a few trades in their portfolio.

Life’s randomness is hard to accept. Why do some folks struggle financially their entire life, while others fly up the corporate ladder at fast-growing companies with booming share prices? Often, it’s easy to see the role of luck in the suffering and successes of others, so we’d be wise to assume that we, too, aren’t fully in control of our own fate.

Focusing on luck may help us to cope with one of life’s least admirable emotions: jealousy. When we think about our successes—financial, career and otherwise—we tend to think not in absolute terms, but about how we’ve done relative to contemporaries, including school friends, neighbors, colleagues and siblings. We’re not bothered by Warren Buffett’s billions. But we’re a little jealous about the college friend who ended up as CEO. Perhaps, however, our friend just had better luck than we did.

Today’s worries are almost always a waste of time, and yet we worry constantly. Many readers will be aware of the hedonic treadmill—our tendency to quickly grow dissatisfied with our latest accomplishment or purchase, and to start striving after something new, confident that this new goal will deliver lasting happiness.

We can think about our worries in the same vein. We finally put our latest fear to rest, only to start fretting about something else. It seems we’re hard-wired to worry, and the moments when we’re completely free of concern are few and far between. This, I assume, was a trait that helped our nomadic ancestors to survive—but I’m not sure it does much for us today, except increasing our unhappiness.

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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Share the Power

LIKE OTHER FOLLOWERS of HumbleDollar, I look forward to Jonathan’s Saturday articles. I have to admit that my interest has been heightened by his cancer diagnosis. Not many folks would have the courage to write about what's going through their mind when they’re fighting for their life. We don’t often get this kind of insight into someone’s life.

Jonathan has probably received a lot of advice about treatment plans and the doctors he should see. I’m sure most of it is out of love and respect for him. I’m not going to offer an opinion on how he should deal with his illness. But I do have one piece of advice: Make sure you have a power of attorney for health care, not just for your own sake, but also for the sake of loved ones. Why is that so important? We don’t know how our life is going to end and how it’s going to affect those around us.

Unfortunately, most of us are so focused on the financial aspect of retirement that a health-care power of attorney is often overlooked. I didn’t realize how important it was until my father started his cancer treatment.

He battled cancer for almost three years. His journey had a profound effect not only on him, but also on our family. After my father started chemotherapy, we noticed his behavior changed. He would easily get angry and rattled. We had to take his car keys away because we feared he’d experience road rage.

My mother would sometimes phone, and ask if I’d come over and see if I could calm him down. He’d get verbally abusive. My dad would tell my mom that he didn’t need her, and that she should leave and not come back. I started spending more time at my parents’ home, because there were times when my mother didn’t want to be alone with my father. This was not the father I’d known.

We told the doctor about my dad’s volatile temper, but he didn’t take us seriously and thought we were overreacting. He even made light of it. “Oh, you’re asking for a happy pill.” Then, one day, I told the doctor that we’d removed my father’s gun from the house because we were afraid of what he might do when he got angry. The doctor finally prescribed medication, but it didn’t help.

Meanwhile, the doctor became increasingly difficult to work with and showed little sympathy. During his medical training, he must have skipped the class on bedside manner. My mother and I would catch hell not only from my father’s outbursts at home, but also from his doctor during office visits.

One day, we told the doctor that my father was complaining about his back bothering him. After examining him, he saw he had shingles. The doctor started berating my mother, telling her she needed to do a better job taking care of her husband. The problem was, my father wasn’t a good patient. He wouldn’t let us touch him.

We tried changing doctors. But two doctors we contacted wouldn’t take him. The third one, we felt, was located too far away. Also, my dad didn’t want to leave his current doctor, so we stayed.

Finally, the doctor told us he couldn’t cure my father, but he could try to extend his life if we wanted to continue treatment. If it was left up to me, I would have said no. My dad’s quality of life was already poor, and I was concerned about my mother’s well-being. But it wasn’t up to me.

The only one who could stop treatment was my mother. She had power of attorney over my father’s health care and it was her decision to make, because my dad couldn’t fully comprehend what was going on.

My mother wanted to continue. She wasn’t ready to let go of him. The doctor prescribed an expensive drug that wasn’t covered under my father’s prescription drug plan. Luckily, because my parents’ income was low, we were able to get financial help from a charitable organization.

Unfortunately, the drug caused my dad to become incontinent. My mother decided it was time to stop treatment and my father entered hospice care.

A few weeks later, we received a letter from my father’s doctor. He was informing all his patients he was closing his office. We heard his practice was in financial trouble because of some bad business decisions. Maybe that’s why he treated us the way he did.

During hospice care, the softer side of my father started to reappear. He was no longer the angry person that he’d been during his treatment. The drugs he was given must have worked their way out of his system.

During my father’s ordeal, I learned that you have to take into consideration how your treatment for a life-threatening illness is affecting the loved ones who are taking care of you. When there’s no hope for survival and my quality of life is poor, I don’t want to burden my wife. I hope that I’m of sound mind and that I’ll know when it’s time for me to go. If not, I want my wife—who holds my power of attorney for health care—to step in and make that decision for me.

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

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Retirement on the Road

WE'VE BEEN TAKING stock of our nomadic life. We’re quite happy living as we are. But we’re also conscious that things could change at any time for multiple reasons, and we’re ready to shift gears if needed.

We aren’t exactly “living the dream”—because being nomadic was never our dream. We hadn’t even thought about it until a few months before we started our travels. We officially uprooted ourselves—meaning we sold our Houston home—after we’d been away from the place for most of the first year of my retirement. We didn’t want to stay where we were, but we also didn’t have a place we wanted to move. Now, as we enter our third year as nomads, we’re thinking of making at least a few smaller changes to our itinerant lifestyle.

Complaints? I have a few. But then again… (sorry, Mr. Sinatra).

I miss my kettlebells, and it’s hard to maintain my certified instructor standards without heavier ones, which you can’t find in most gyms. My wife is an amazing cook and enjoys it, but it’s less enjoyable when a kitchen has crummy pans and knives, plus she has her own fitness goals that are difficult to achieve when bouncing among whatever gyms are available, if any. It’s also a challenge for us to eat properly when dealing with different kitchens and different stores, especially so when you throw in certain dietary requirements.

To be fair, we’ve been able to enjoy some impressive kitchens and gyms. Still, inconsistent eating and fitness are our biggest day-to-day concerns. I realize these will strike some as minor issues, but people are different and, for us, such things are important. We’ll often go out of our way and pay more than usual for short-term access to a good gym or for the food that we need or want.

We rent a storage unit in Texas that we haven’t seen since we filled it, and it’s become a subject of frequent discussions. Hurricane Beryl nudged us toward action when it caused our storage facility to lose power for an extended period. When we go back to the U.S. in early 2025 to see our parents, we’ll grudgingly make time to go to the storage unit… and do something.

Our options range from further downsizing to a full or partial move of our belongings to Virginia, near where we store our car. On the other hand, we might soon find we’ve wasted time and money moving things we must move again or, alternatively, that we got rid of things we wish we still had. This used to be a mental obstacle to action, but we’ve gotten over it. Whatever we decide won’t be perfect, but it’ll hopefully improve the situation and we’ll stop talking about the storage unit for a while.

So far, these things aren’t enough to make us settle down. But we have been thinking about being in one location for a longer period. Since we started this journey in late 2022, we haven’t been in one place longer than five weeks. Let me tell you that, even if you only have a carry-on and a backpack, unpacking for five weeks is quite a treat, and three to six months has some real attraction.

It would be nice to be somewhere long enough to become part of a community and develop a routine that’ll last for a little while, even if it’s not necessarily where we plan to spend years. Would we move some of our things out of storage? Who knows? But for a several months’ stay, we wouldn’t be beyond buying things we need and donating them when it’s time to move on.

Where would we go? This is another frequent topic of discussion. We like England a lot and can stay in the UK for up to six months on a tourist visa. I’m partial to Italy and speak the language, but a tourist visa there will only get us three months. We haven’t found that many places in the U.S. where we’re excited to stay a long time, but that’s partially because so much of our travel has been out of the country. For no particular reason, some places in the U.S. that were once on the short list for our future home don’t hold the same appeal they once did.

We sometimes think about buying property, possibly to use as a base for a couple of months each year and possibly just as an investment. That said, we don’t keep a lot of cash or bonds in our taxable accounts, waiting for a home purchase that may never happen. Buying would almost certainly entail selling stocks in those accounts. We’d be ready to do this, even if the market were down, as we could offset this with a shift into stocks in our tax-protected accounts. This could apply not only to buying property, but also to any other eventuality that suddenly required us to spend significant cash.

Because of the inherent uncertainty in our lives, we value flexibility in our finances. Our next few months of travel and expenses are usually predictable, even though locations are changing, but we don’t know what we don’t know. A medical emergency or a serious health diagnosis could mean a move at short notice to get care.

It would be a place that isn’t home, nor necessarily a town we know or where we have a circle of friends. More likely than not, we’d initially deal with the situation outside the U.S. Likewise, a serious family situation might provoke a similar sudden move. With both of us around age 60, living in unfamiliar surroundings, and with four parents in their 80s, this is not an insignificant consideration.

We’re thankful that, as we consider possible changes, our current motivation to make those changes isn’t health, family or financial problems, or because there’s some necessity we’re missing. Rather, it’s the desire for more of certain things that aren’t necessities, but which are important to us.

That said, we also enjoy novelty and exploration. If we were to settle into a routine and a community, even if we enjoyed it, I suspect we’d want to shake up our lives occasionally. We like our lifestyle and we’re happy, and we recognize that the ability to enjoy it is a gift.

Michael Perry is a former career Army officer and external affairs executive for a Fortune 100 company. In addition to personal finance and investing, his interests include reading, traveling, being outdoors, strength training and coaching, and cocktails. Check out his earlier articles.

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