Jonathan Clements's Blog, page 80

Price of Playing

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

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

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

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

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

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

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

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

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

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

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Bet on Low Costs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

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Living It Up

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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What I Always Wanted

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Getting Roasted

"YOU WILL ROTH!"

“But Dad, I’m only 10.”

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

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

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

“I like to play soccer.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

They had not.

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Hardly Missed

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

But my list of regrets has three glaring omissions.

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

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

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

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

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

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

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

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Misleading Indicators

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

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Stuck at Home

IT'S AN ARGUMENT I’ll never win. But perhaps I can sow a few seeds of doubt.

The anti-foreign-stock drumbeat has grown louder with each additional year that international markets underperform U.S. shares. Indeed, even though foreign stocks beat U.S. shares in the 1970s, 1980s and 2000s, there are folks today who argue there’s no reason to own foreign shares.

Really? Before you throw in the towel, ask yourself six questions:

1. If U.S. stocks had lousy returns for 15 years, would you abandon them? Since year-end 2009, foreign stocks have lagged behind U.S. shares almost every year. If U.S. stocks had served up that sort of mediocre performance, and I declared that it was time to give up on America’s publicly traded companies, readers would eviscerate me for my flip-flopping, failure to appreciate market history, and possible horrible market-timing—and the criticism would be richly deserved.

2. If U.S. multinationals are a good substitute for investing abroad, why don’t they perform like large-cap foreign stocks? Pained by international markets’ lackluster results, it seems many U.S. investors are looking for an excuse not to invest overseas.

One of their favorite contentions: There’s no need to own foreign stocks, because U.S. corporations offer ample international exposure. But if that were truly the case, wouldn’t returns for large-cap stocks in the two markets be similar? Yet, over the 15 years through Oct. 31, MSCI’s Europe, Australasia and Far East index has notched just 5.7% a year, far behind the S&P 500’s 14.2%.

3. Yes, foreign companies offer fewer legal protections and greater business risk. But isn't this already reflected in share prices? Arguably, investors today are getting paid to take the greater risk associated with international markets.

For instance, the stocks in Vanguard Total Stock Market ETF (symbol: VTI) sport a price-earnings (P/E) ratio of 26, based on the past year's earnings, versus 15.7 for Vanguard FTSE Developed Markets ETF (VEA) and 15.5 for Vanguard FTSE Emerging Markets ETF (VWO). That huge difference in P/E ratios tells you how much more comfortable investors are owning U.S. companies—and how much more room there is for foreign-stock valuations to rise.

4. If foreign stocks are riskier, shouldn’t they offer higher returns? Many in the anti-foreign-stock camp are trying to have it both ways: They’ll claim that U.S. shares are less risky—and yet they’re also confident that U.S. shares will continue to outperform. What happened to the notion that high risk and potentially high return go hand in hand?

5. If you’re an indexer happy to hold U.S. stocks according to their market value, shouldn’t you also be willing to allocate among countries on the same basis? Many—and perhaps most—HumbleDollar readers are index-fund investors, and most index funds weight stocks based on their stock-market capitalization. Today, for instance, that means having 6% of your U.S. stock market money in Apple and almost nothing in Bath & Body Works.

Yes, some carp that this weighting scheme leads to too much money in tech stocks. Still, despite that, I haven’t heard of many folks giving up on their S&P 500 or U.S. total market index funds. I have, however, heard countless folks say there’s no way they’d put roughly 40% of their stock portfolio in foreign markets, even though that’s what a market capitalization approach would suggest.

In designing my own investment mix, I take my cues from the so-called global market portfolio. Investors worldwide have collectively decided that foreign stocks should account for 40% of the global stock market’s value. Who am I to disagree? That’s why Vanguard Total World Stock Index Fund (VT and VTWAX) is my largest fund holding.

To be sure, that opens me up to the risk of both foreign stock and currency fluctuations. The dollar has strengthened in the foreign-exchange market over the past decade-plus, denting the performance of overseas stocks for U.S. holders.

Will that persist? Nobody knows. In fact, nobody knows what will happen to global stock and currency markets in the short-term—which is why I believe you should keep money you plan to spend soon out of stocks, and especially foreign stocks, and in nothing riskier than high-quality, short-term U.S. bonds.

But that doesn't preclude owning international markets. Suppose you’re retired and have half your money in U.S. bonds and half in Vanguard Total World Stock. Result? Some 20% of your overall portfolio would be subject to the whims of the foreign-exchange market and foreign stock markets—an acceptable level of risk, I’d argue.

Can’t bring yourself to stash 40% of your stock-market money overseas? I’d strongly favor going for at least 20%. At that level, investors can get much of the reduction in portfolio volatility that comes with owning foreign stocks.

6. What if you’re wrong? Foreign stocks’ diversification benefit isn’t just about tempering a portfolio’s price swings. It’s also insurance against truly terrible results. You might be confident that U.S. stocks will continue to reign supreme, offering a magical combination of high returns and low risk. But what if you’re badly wrong?

I hate to bring up Japan’s 34-year market disaster once again, and yet I consider it the most significant financial event of my lifetime. What if, in 1989, you were a Japanese investor who was so convinced of your home economy’s strength that you had 100% of your retirement money invested in domestic stocks? At the time, the Japanese economy was the envy of the world. Few foresaw the stock-market debacle that was to come.

Could a similar debacle await U.S. stocks? It’s unlikely. But low risk isn’t the same as no risk. Is it wise to bet your stock portfolio solely on the U.S. market? Many investors are doing just that—and it worries me.

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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What’s on Your List?

FOUR 20-SOMETHINGS named Ben, Duncan, Jonnie and Dave came up with a great idea for a reality show in 2010. It involved a purple bus named Penelope, a cross-country road trip and a list of 100 things to do before you die. For every item they crossed off their list, they’d help a stranger achieve something on his or her own list. 

Some of their to-dos were ambitious, with a low probability of success: host Saturday Night Live, kiss Rachel McAdams, go to space. 

Some were funny. Tell a judge, "You want the truth? You can't handle the truth." 

Some were sweetly generous: buy dinner for a stranger, take kids on a shopping spree, pay for someone's groceries. 

The show, called The Buried Life, lasted two seasons and was one of MTV's highest-rated shows ever. The show’s four founders also put together a book, What Do You Want to Do Before You Die? Among the questions asked by The New York Times bestseller: What would you do if you only had one day left to live? Would you plant a tree? Would you rob a bank? Would you tell someone how you really feel?

This notion of a bucket list has taken hold in recent decades. Indeed, there was even a movie called The Bucket List, starring Morgan Freeman and Jack Nicholson, that was released in 2007. It was full of exotic travel destinations: the Taj Mahal, the Pyramids, the Serengeti, Stonehenge, Hong Kong, Rome, the Great Wall of China. A popular series of books came out soon after, called 1,000 Places to Visit Before You Die. 

A friend of mine hates bucket lists. She thinks they're too show off-y and competitive, and that checking off bucket-list items doesn't do anything to improve long-term happiness. I totally understand where she's coming from. What if you do Burning Man, and see the Northern Lights, and jump out of an airplane, and stay at the Four Seasons Hotel in Istanbul (okay, I admit that last one is personal), and… and… and… you get to the end of your list and you're bored or sad? Or what if you're more of a homebody, and nothing about exotic travel excites you? Are you supposed to just throw in the towel?

Productivity expert Khe Hy writes in his essay "Why Bucket Lists Are BS" that, instead of a to-do list, we should all have a to-be list, with things like "be kind" and "be creative." In a separate post, "Why Your Goals Are Missing the Mark,” he suggests that effective goals are the ones that have an inner purpose. Your goal of throwing a really great dinner party, he says, may be about a desire to spread joy and laughter. Similarly, your goal of losing 10 pounds could be restated as a commitment to having more energy to play with your kids. 

Are bucket lists really so bad? I dunno. I kind of like the idea of recognizing that our time on earth is limited, and then connecting that bummer of a thought to a list of things I want to accomplish before I croak. But could we attach a deeper meaning to each item?

Example: I want to learn to play mahjong or bridge. Maybe that sounds too small or not glamorous enough for a bucket list, but it's going on mine. Next to it, I can write my "why," which is that I want to have a way to stay connected to society even when I'm old. I want to be able to meet new friends and have a regular social activity that gets me out of the house. Perhaps I could include golf in the same category, though so far I'm not really feeling that one.

You could add a "why" even to your travel wish list. Seeing the world with kids or friends is a great way to bond with them, and it’s also an authentic hands-on education. Traveling solo works, too, because as much as airplanes and shlepping are the worst, opening your eyes to new cultures and experiencing the planet's awesome beauty is amazing. And a little bragging—in moderation—about places you've seen can be a cool way to connect with like-minded adventurers. 

Maybe folks could argue that there's a fine line between an aspirational, purposeful bucket list and an overly long to-do list that ends up feeling trivial. But I think that line is pretty easy to identify, and unique to who you are. And honestly, if taking the time to write down your list reminds you to experience something like paying a stranger's grocery bill or throwing yourself a really great birthday party, is that so wrong? If nothing else, it gives you guidance as to where your extra dollars could be going.

Alina Fisch is the founder of Contessa Capital Advisors , an independent fee-only investment advisor. She’s worked in financial services for more than 25 years. Her focus today is on helping single and divorced women with their finances, a topic she also loves to write about. In her free time, Alina is an avid reader, animal lover, hiker, traveler and vegetable farmer. Her previous article was Sailing Away.

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Household Affairs

IN JANUARY, I surrendered to passionate irrationality, buying a park unit in Arizona that has become my second home.

Now I understand why, at least in the movie cliché, a man might buy house slippers for his long-suffering wife’s birthday, while giving flashy, expensive baubles to his girlfriend for no reason at all.

My single-wide “girlfriend” is tiny and fragile, the bloom off her youth. Things that improve her are easily obtained. A phone call to a friendly fellow at a store, the provision of a credit card number, and—voila—my private world is transformed for the better. Rational me knows the value I derive from each expenditure might be marginal, perhaps an imaginary gain or even an actual loss.

Meanwhile, our longtime family home in California could also benefit from a new refrigerator, as well as much, much more. Over three decades of living in that house, I’ve remodeled, bought new appliances, replaced a furnace, changed out windows, and completed countless other projects. I have clear memories of improvements that helped and ones that disappointed.

As of today, my 2007 kitchen remodel refrigerator has yet to die, so I’m thinking it can wait another year. After all, even when I’m living in the old family house, I’m not staring at the refrigerator nonstop. I might be in the living room, or dining room, or upstairs or out in the yard, with no thoughts of refrigeration clouding my mind.

Here in my immobile home, the living room is also the dining room and the kitchen. Its tiniest flaws, any neglected maintenance, sit in plain view. On top of that—though not always the case—improving my single wide can require minuscule amounts of time, effort and cost. Less than a single quart repainted the “kitchen” and, with under 20 square feet of visible wall, no ladder was required. The whole of the “living room” took one evening to paint.

In a minor triumph of inspiration and imagination, I removed two cupboard doors to create a built-in bookshelf. Then I repurposed the doors as a faux cupboard, masking a badly executed prior owner’s remodeling project. Total expenditure: zero dollars and an hour with a screwdriver, tape measure and level.

Refurbishing the main family house, by contrast, usually involves dollar amounts that start close to $1,000 and easily end on the high side of $50,000. Not to mention weeks or months of arranging details and schedules with scarce home-improvement contractors.

Even here in Arizona, in the land of easy upgrades, a new refrigerator is not a low-cost item. Neither was the washing machine, nor installing a water conditioner. And I have my eye on an electric induction range next.

The easy immediacy of improvements in a small home is a delight. I see changes in an afternoon, making the place ever more useful and attractive as I put my individual stamp on its functionality.

I like to show off my trophy wife—or is it girlfriend?—of a holiday home. Family and friends smile at my fresh paint, a patched and scrubbed counter, a single fixed railing. By contrast, it’s been a decade since anyone walked into my California house and said, “Wow, this place looks so much better.”

I’m learning new things, having fun, and spending my hard-saved investment dollars on myself and others while I’m still around to enjoy the effects. This is my new self and a different life. I’ve uncovered an inner home engineer, and she turns out to be a spender.

I’m not that man in the cliché, however. Next time that I’m back in California, at the big old reliable house with her good bones, I promise to measure for a new refrigerator.

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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