Jonathan Clements's Blog, page 85

Try to Be Satisfied

ONE OF MY FAVORITE books is The Paradox of Choice by Barry Schwartz. Its subtitle is Why More Is Less: How the Culture of Abundance Robs Us of Satisfaction. The principles that the book discusses have important implications for how we manage our money.

Schwartz distinguishes between “maximizers” and “satisficers.” A maximizer is someone who needs to be assured that he or she is making the best decision possible. By contrast, a satisficer can feel settled with a decision that’s good enough, and doesn’t spend time worrying whether a better alternative might have been missed.

I imagine everyone lives on a spectrum somewhere between pure maximizer and pure satisficer. By temperament, I tend to be a maximizer. Still, I’ve been working on becoming more of a satisficer.

What are the downsides of being a maximizer? Maximizers enjoy positive events less than satisficers and don’t handle it as well when negative things occur. When something bad—like a financial setback—happens to maximizers, their sense of well-being takes longer to recover. Maximizers ruminate more than satisficers. They experience more feelings of regret. In general, maximizers tend to be less happy than satisficers.

I think those of us who take in a lot of financial information can find ourselves nudged toward the maximizer end of the spectrum. How often have you read a financial article and afterwards had an uneasy feeling that maybe you don’t have the optimal mix of stocks and bonds, or that you lack the appropriate exposure to international markets, or that you have too much cash in your portfolio?

There are many areas of my financial life where it isn’t clear that I’ve made the best decision—if maximizing wealth is the ultimate goal. Indeed, some choices I’ve made have clearly reduced my net worth. To be a good satisficer, I need to feel comfortable with these decisions. Here are some examples of financial decisions I’ve made that have resulted in wealth not being maximized:

Pension choices. In the middle of my career, I had to decide whether to stay with my traditional pension or move to a cash balance plan. Using the best information available to me at the time, I selected the cash balance option. Years after I locked in my decision, changes were made to the cash balance formula that made it less lucrative. I had no way of knowing that would happen when I made my initial choice.

When I retired last year, I had the option of taking a cash lump sum or receiving a monthly payment for life. Again, I made what appeared to be the best choice at the time: I took the monthly payments with a 100% survivor option. The amount of the monthly payment is clearly less than what I would have received had I stayed with the traditional pension formula initially.

Whether the monthly payment option was the right choice for my cash balance pension remains to be seen. If my wife and I both die younger than expected, it would have been better—in hindsight—to have taken the lump sum. Being dead, we wouldn’t care, but our heirs might.

Retirement savings. I’ve discussed before that I didn’t contribute much to my 401(k) early in my career and that I didn’t invest aggressively. I certainly didn’t maximize my 401(k) account’s growth potential. Still, the percentage of my financial wealth in tax-deferred savings is uncomfortably high. The tax implications of managing that account are thorny enough already. Had I maximized my 401(k) over my entire career, Uncle Sam might have ended up being a major beneficiary of my frugality.

Charitable giving. I’ve shared previously how charitable giving is a priority for my wife and me. In fact, we’ve given away more money over the years than I contributed to my 401(k). Had maximizing wealth been our objective, this would’ve been quite counterproductive.

But here’s the thing: For us, our ultimate goal is to be good stewards of the wealth entrusted to us, not necessarily to maximize it. Money has deep spiritual implications for our lives. We follow someone who said you cannot serve both God and money. Giving money away is the best way we’ve found to avoid serving it.

Social Security. The decision of when to start receiving Social Security benefits still lies ahead for my wife and me. There are varying philosophies regarding when you should begin. The conventional advice is for the family’s main breadwinner to defer taking Social Security until age 70 if possible.

Still, when I input our specific information into an online calculator, the recommended commencement age for me was computed to be just under age 63. I’m sure we won’t make the optimal decision, whatever that might be for us. Still, I don’t plan on agonizing over it or feeling regret. Without foreknowledge of one’s date of death, it’s impossible to know whether you’re making the “best” choice.

I’m satisfied with our retirement savings. I don’t want to feel compelled to maximize the balance. Given that my wife and I appear to be on track for a financially successful retirement, gratitude seems more appropriate than rumination and regret.

Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs. Follow Ken on X @Nuke_Ken and check out his earlier articles.

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Back to Life

SOME PEOPLE CAN LOOK at a blank page and imagine a new creation—perhaps a new business or a new house. I can’t.

What I seem to be pretty good at is taking something that’s broken and coming up with creative solutions for fixing it. It's like a game or a puzzle. The goal: Bring this broken object back to life as cheaply as possible.

When, say, a washing machine or a dishwasher breaks, the repair person will look up the manufacturer and order the necessary replacement part. The repair person will install the part, and charge you for labor, plus a marked-up price for the part. Most folks are accustomed to this, and view the expense as the cost of doing business. I see it differently.

The manufacturer’s parts are designed to fit the original product, but that fit comes at a premium price. Suppose a part breaks on your Ford SUV or pickup truck. Yes, you could go to a Ford dealership. But what most people don’t understand is the dealership makes its largest profit not on the sale of a vehicle, but from servicing it. When something needs repairing, the dealership only installs original equipment manufacturer (OEM) parts and it charges high hourly labor rates.

Folks who go this route soon start complaining about how expensive it is to keep their vehicle running, so they elect to buy a new one. That means not only a new auto loan, but also an incentive to get the new vehicle serviced at the dealership, so they don’t void the warranty. It’s a nice racket for the dealer.

Instead of OEM parts, there are aftermarket parts sold at places like Advance Auto Parts, AutoZone, NAPA and O’Reilly. Typically, they’re much cheaper than OEM parts and, in most cases, the aftermarket part will fit your vehicle, though not always, so some adjustments may be necessary.

What if replacement parts are no longer sold? That’s where creativity comes in. You have to see what the part looks like and go hunting for an alternative. That’s why I find myself wandering the aisles of hardware and auto parts stores, looking at the items displayed and trying to match them with what I need. It’s time consuming, but rewarding when it works out.

Knowing how my brain works, my wife will throw down a challenge, handing me something and saying, “Fix it.” That’s what I did with an old seed spreader that she handed me.

It’s also the way I rebuilt my 1983 Honda FT500 Ascot motorcycle. The bike had sat in the garage for 34 years because my wife hates motorcycles and wouldn’t let me ride it. Upon retirement, I promised to get it running again and then sell it, so she gave me the green light to begin the restoration.

The motorcycle was only manufactured for two years. As you’d expect with “planned obsolescence,” replacement parts are no longer sold by Honda, which would obviously prefer that folks bought a new motorcycle instead.

I discovered the brakes on the Ascot had seized up, so I had to break them loose. This meant fixing the two brake calipers and two master cylinders. I purchased replacement components for each, but couldn’t properly fix one of the master cylinders. After much trial and error, I found a satisfactory alternative, but I then needed to build a replacement brake line, which I did.

I sold the motorcycle to a guy living in New Hampshire who used to own the exact same bike, but had sold it and regretted the decision ever since. This meant one less thing in my garage, plus I felt good that the motorcycle gets to live another day with someone who’ll enjoy it.

My projects don’t always end so well. Many times, I start to fix something but end up buying a new one instead. Still, I get satisfaction from trying.

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Be Well

HOW CAN WE GET greater satisfaction from our life—and what role does money play? Below is an edited excerpt from A Wealth of Well-Being , published this month by Wiley.

I often note that the biggest risks in life aren’t found in the stock market. If you want real risk, I say, get married. And if you want more risk, have children.

People laugh. The point is obvious. Yet that point is regularly lost when we speak about financial well-being, and the result is we end up neglecting our life well-being. I was motivated to write my book, A Wealth of Well-Being, by reflecting on my own financial and life well-being, as well as those of others.

Financial well-being comes when we can meet current and future financial obligations, absorb financial setbacks, and keep driving toward financial goals, such as adequate retirement income. Life well-being comes when we lead satisfying lives, full of meaning and purpose. We need financial well-being to enjoy life well-being, but it is life well-being that we seek.

I was born to Holocaust survivors in 1947 in a displaced persons’ camp in Germany. We came to Israel in 1949. Navah, my wife, and I were students at the Hebrew University of Jerusalem when we were married in 1969.

Our parents sought to enhance our financial and life well-being, and their own life well-being, at the cost of some of their financial well-being. A few months before our wedding, my parents traveled to meet Navah’s. After dinner, Navah and I were excused to go for a walk, and our parents set down to business. Business meant deciding how much each set of parents would contribute to support the young couple, helping with a down payment on an apartment.

My parents were far from wealthy, and Navah’s parents had even less. But as I learned later, Navah’s mother said to her father, “Whatever Meir’s parents offer, we will match.” They borrowed some of the money from relatives and repaid it later.

I graduated from the Hebrew University with a BA in economics and statistics, and an MBA, and got a job as a financial analyst at a large government-owned company. The job enhanced my financial well-being. Indeed, I could have worked there for many decades and retired with an adequate pension. Yet the job diminished my life well-being. As I would say later, projects lasted longer than my interest in them.

One morning I got up, called work to say that I would not be in, and Navah and I traveled to Jerusalem, where I remembered a library that had a catalog of American PhD programs. It also had a catalog of scholarships available to foreign students. One institution wrote back to say that they couldn’t tell from my name whether I was a man or a woman, but I should know that this is an endowment of a sorority, awarding scholarships only to women. I had better luck elsewhere. Meanwhile, in time, Navah also applied and received a scholarship that paid most of the tuition for her master’s program.

Parents properly consider their own financial and life well-being, and those of all their children, as they respond to their children’s requests for support. Navah and I had sufficient means to live as students when we arrived in New York to study at Columbia University. But during the application period, I grew concerned that we would have to forgo our plans because we wouldn’t have sufficient means. I asked my father for a loan.

“I wish I could lend you money,” said my father. “But you have a younger brother and sister, and they would also need support when they are married. I do not have financial means beyond that.”

Life well-being has many domains, including those of family, friends, health, work, education, religion and society. Few are fortunate enough to enjoy life well-being in all domains, free of the injuries of poverty, disabled children, difficult marriages or serious illnesses. Life well-being calls for applying well-being medicine from one part of a domain to heal well-being injuries in another, and from one domain to others. And life well-being calls on all of us to apply well-being medicine in empathy and help to the well-being injuries of others.

Our family isn’t among the few who enjoy life well-being in all its domains. Barbara, our older daughter, lives with bipolar illness. Her illness was not diagnosed for years, during which we were told that her difficulties stem from family dynamics. It seemed that the only question yet to be answered was whether blame lay with Navah or with me. We let our anguish seep into our marriage, diminishing our life well-being in that domain, beyond the domain of parents and children.

Some well-being injuries are more difficult to disclose than others, inhibiting empathy and help. I recall envying a colleague who received much empathy for having to make two mortgage payments each month, as he bought a new house before selling his old one. Yet I felt constrained from receiving empathy by disclosing Barbara’s difficulties, along with those of Navah and me.

We enjoy greater life well-being now, as Barbara’s situation is stable. She says “I love you” at the end of every conversation. Navah continues to enhance the life well-being of many people living with mental illness and their families as a volunteer at the National Alliance on Mental Illness. We’re fortunate to have an ample finances domain, able to support Barbara without constraining our budget, and we are even more fortunate in the family domain as Ruth—Barbara’s younger sister—loves and supports her.

I no longer feel constrained from disclosing our family’s injury. I recently disclosed that injury to a colleague. He responded by telling me about his daughter, who suffered a traumatic brain injury several years ago. Now, he said, his life and that of his family revolve around supporting their daughter. We empathized and comforted each other, and turned from colleagues into friends.

I see the need to explore life well-being and enhance it in my own experiences, in the experiences of people I know or read about, and in the experiences of financial advisors and their clients.

Some years ago, an advisor I know called to ask for advice. His young son had just experienced a psychotic break. He and his wife were shocked and bewildered. I invited them to our home for a conversation with Navah and me. We described our identical shock and bewilderment years before, offered our empathy and help, and shared with them what we’ve learned from our experiences and those of others.

This advisor now cares for many clients living with mental illness, as well as their families. Some people living with bipolar illness may spend recklessly when in manic states. The advisor described a client admitted for psychiatric care who requested that the custodian overseeing his funds remove his financial advisor, so he could withdraw a large sum of money. When his manic state subsided, the client was surprised at what he'd done, and reinstated the advisor. Concerned about a recurrence, the client has designated a trusted person to evaluate his requests before proceeding.

I teach investment courses in our graduate programs. I teach the usual content of such courses, including portfolio theory, asset pricing theory and market efficiency. But I also help my students explore links between financial well-being and life well-being. My students share their stories of saving, spending, investing, financial well-being and life well-being with one another and with me, and I share my stories with them. In the process, I enhance both my students’ life well-being and my own.

One assignment presents an alphabetical list of 10 wants answering the question, “Why is wealth important to you?” The possible answers include “buying the things I really want,” “educating my children,” “helping the less fortunate” and “providing financial security.” I ask my students to rank the wants by their importance to them and explain their rankings. I also ask them to comment on the postings of classmates.

One wrote: “Providing financial security is right at the top of my list. It's not just about me; it's about my family's journey and their struggles after the Vietnam War.”

Another wrote: “Am I too selfish or unethical if I place helping the less fortunate as the last thing that I prioritize in life?” 

And yet another wrote: “Fourteen years ago, prior to the birth of my son, I would have put buying things for myself as my main goal. Now, my mind is centered on my son.”

In my book, I share what I’ve learned about financial well-being and life well-being. I hope that my words will help readers reflect on their financial well-being and life well-being, and enhance them.

Meir Statman is a finance professor at Santa Clara University and a leading expert on behavioral finance. In addition to A Wealth of Well-Being, his books include Finance for Normal People and What Investors Really Want. Meir’s previous article for HumbleDollar was Retire Those Fears.

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Elder Care—Not

I KEEP SEEING THEM—overly complicated, overly expensive investment portfolios. The most recent belonged to a widow in her 70s, with modest earned income, Social Security benefits and about $5,000 in taxable fund distributions for 2023. She was someone I helped during the recent tax-filing season, when I was volunteering at an AARP TaxAide site in Monmouth County, New Jersey.

Her portfolio held about a dozen mutual funds, most of which I’d never heard of. It included a bond index fund from a large insurance company that charged 0.5% in annual expenses. It tracks the same index as Vanguard Total Bond Market Index Fund (symbol: VBTLX), which charges just 0.05%, or one-tenth the fee. Moreover, the Vanguard fund can also be purchased as an ETF (BND) with a 0.03% annual fee.

In 2023, our widow had two mutual fund sales. They seem to have been chosen so they resulted in no taxable gain—a benefit to the taxpayer. But interestingly, the proceeds provided just enough money to cover the $2,500 annual fee that the financial planner charged. It seems her portfolio is worth around $200,000, so the $2,500 she was charged apparently represents a 1.25% annual fee, which is on top of the fund expenses she incurs.

The financial planner listed on the statement is part of a large financial planning firm, with more than 20,000 financial professionals nationwide and $1 trillion in assets under management. I imagine that, for a busy financial planner, this woman’s account ranked pretty low in importance. When I explained to the client what the statement represented, she quietly admitted she didn’t understand how her money was invested. More important, she said she couldn’t get the planner to return her calls. She asked how to go about finding someone new.

Last year, I also wrote about the overly complicated, overly expensive portfolios I saw during tax season. This is a problem that won’t go away, and it isn’t limited to seniors. I’ve also seen unusual investment statements brought in by clients of every age, from their 20s to their 60s. In most cases, the clients didn’t understand what they were invested in. I try to explain the statements, but it rarely seems to help.

I know a number of financial professionals who provide a great service to their clients. But many financial advisors are less than ethical—and yet clients stick with them. Inertia is a common human trait, which is why I expect to continue seeing expensive and inappropriate portfolios in future tax seasons.

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Extra Innings

IN MY EARLY 50s, when retirement began looking like a viable option, I started thinking seriously about what my life might look like after I stopped working as an engineer at a nearby nuclear power plant. Earlier in my career, I’d imagined living off my pension and not working at all. But by my 50s, I wasn’t so sure. I felt retirement could be a time to explore other work opportunities.

My favorite hardware store is less than a mile from my house. At one time, a retired teacher—who’s a friend from church—worked there. I enjoyed chatting with him about his experience. I was attracted by the idea of being able to help people, without the stress of meeting deadlines for a multi-million-dollar project. Mentally, I put the hardware store on my short list.

I looked at classified job ads in my local paper. With money no longer a prime consideration, I figured I could explore all kinds of possibilities. I thought about working at a hospital. Maybe I could find a job that involved caring for cats or dogs. Whatever I chose, I wanted to be able to work in a pleasant environment and make a meaningful contribution.

Last year, when the time came to actually retire and settle on an encore career, it seemed prudent to pick something closer to my current profession. I’d spent 38 years developing specialized skills. Fortunately, those skills turned out to be in high demand. Once I changed my LinkedIn profile to “Open to Work,” recruiters started contacting me. I ended up doing several interviews. The process was great fun. Since I didn’t really need a job, there was no reason to be tense in interviews, and I spoke my mind freely.

One attractive opportunity had some travel in its job description. I told the recruiter I wasn’t interested in doing any work-related travel. Undeterred, she went back to the hiring manager with my no-travel demand, and he decided he was still interested. I was impressed by the director and manager who interviewed me, and ended up accepting their job offer.

The company is significantly smaller than my old employer, with a headcount that’s less than 3% of my former company’s workforce. There are more diverse opportunities—not just nuclear. As a fully remote employee, the opportunity for engaging in “water cooler” conversations is limited. Still, I’m getting to know my coworkers. Almost all are seasoned professionals, and there’s been no hint of drama.

I averaged 15 to 20 hours a week through 2023’s last four months. This allowed me to avoid dipping into savings as I waited for my pension to start in January. So far this year, I’ve worked fewer hours as the company waits for new contracts to get inked. I’ve filled some of the free time by working on my other part-time job—writing for HumbleDollar.

Most of my friends from the plant also retired around age 60. Few have elected to continue working in the traditional sense, and they all seem to be enjoying their retirement.

One exception is my good friend, Gopi, who only started working in nuclear power when he was 60—his own encore career. He’d designed the first television made in India and personally presented it to Prime Minister Indira Gandhi during a news conference at her residence. After moving to the U.S. many years ago, he enjoyed a successful career in electronics. He holds seven U.S. patents.

When Gopi joined my old employer, he was only planning to stay five years. But he found he enjoyed the work and the people so much that he ended up making it 12. As he closes in on age 80, he still does a bit of consulting and overseas work travel. I admire Gopi’s work ethic—but I’m pretty certain my encore career won’t last nearly so long.

Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs. Follow Ken on X @Nuke_Ken and check out his earlier articles.

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The Retiree’s Dilemma

I'VE FOUND RETIREMENT to be a conundrum. We finally have the time to pursue any activity we want in a leisurely manner—spend time with family and friends, exercise, sleep, travel, read, binge watch TV, knock items off our bucket list. On the other hand, I now hear the constant ticking of life’s clock.

Tick tock, tick tock.

For the decades before retiring, life for my wife and me was pedal-to-the-metal with work, children, commuting and chores, though we also found time for some leisure activities. We were on life’s proverbial treadmill and fully embraced the rat race. We were also often stressed, short on sleep and behind on chores.

Yet we loved every minute of our fast-paced life. The best part: I was completely unaware of life’s ticking clock.

In the seven years since retiring, my wife and I have traveled, hiked extensively, and been there whenever our children needed a helping hand. We’ve reconnected with old friends. I’ve ramped up my jogging and biking, and tried out new things like fishing, wake-surfing and the requisite pickleball.

In addition, we now get more sleep and have more time for volunteer activities. My wife manages our VRBO endeavors, while I’ve written many articles and a book.    

On the surface, retirement seems so perfect: no commute, no work and the freedom to do the things we enjoy, while our adult children progress nicely. Busy is good. But during the down time, the ticking of that darn clock keeps sounding in my head.

That relentless clock has driven us to contemplate the time-value tradeoff of life’s many activities, with our remaining time becoming ever more precious. Family, friends, exercise, outdoor activities and vacations get an automatic pass. Always more, please. Activities important to our future lives—chores, financial planning, health maintenance and the like—also get priority.

On the other hand, we’re constantly questioning whether marginal activities are worth pursuing—and that includes writing blog posts like this one. In the no-go category falls much of TV, news, social media, politics, click-baited internet sites, thick books, long blog posts and princes seeking help with their inheritance. Experiences must do more than merely fill time.  

For example, we use a 75% Rotten Tomatoes hurdle before pressing play on TV shows and movies. Likewise, we typically seek reviews of around 4.5 stars from Amazon for books, AllTrails for hikes, Yelp for restaurants and Wine.com for vino.

Even if the reviews are good, we sometimes discard TV shows after 20 minutes and books after 20 pages. I have a file of abandoned blog posts that just weren’t worth my time to complete. We now regularly ditch outdoor activities if the weather is miserable and recently left a mediocre theater production early. If activities aren’t going well, we no longer tolerate them to completion but instead move on.   

Therein lies retirement’s conundrum: how to get the biggest bang out of our remaining time. Much has been written about finding purpose and engagement in our retirement activities. For most HumbleDollar readers, this probably looms larger than financial issues. The offsetting challenge is to undertake these activities at a comfortable and joyful retiree pace.   

My conclusion: managing time’s tradeoffs—with an eye to muting that ticking clock—is the overriding retiree dilemma.

John Yeigh is an author, coach and youth sports advocate. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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Ask the Question

I WAS A PART-TIME instructor in public speaking for Dale Carnegie & Associates during the 1980s and early 1990s. I taught a course at the Downtown Athletic Club in lower Manhattan.

At the time, my wife and I were living in northwestern New Jersey, and we each took the bus into Manhattan to our respective jobs. The course was given after work, so I had to take a late bus home. This meant my wife needed to drive to the bus depot to pick me up.

One night, I arrived at the bus stop, but my wife wasn’t there. I called our condo, thinking she’d fallen asleep, but she never picked up the phone. This was prior to cell phones. I called repeatedly, thinking that, if she had fallen asleep, the ringing phone would wake her up. But she never picked up.

Just after I made yet another call, a police car pulled up and my wife got out of the back seat. She greeted me with, “Hello, honey.” The cop greeted me by asking, “Sir, do you have a license and registration for your car?” I said “yes,” and presented both. He then informed me that my wife didn’t have a valid driver’s license.

Like me, my wife grew up on Long Island, New York. She’d tell me about the cars she owned and the adventures she had driving around Long Island. When we got married, the only question I asked her was, “Do you know how to drive a stick shift?” She said “yes.” This was important since I owned one car and she didn’t own any. I assumed she had a license. How else could she have driven a car on Long Island?

It turns out she did have a license when she was living on Long Island. But when she moved to Manhattan, she let it lapse since she didn’t need to drive. In her defense, she forgot the license had lapsed.

The upshot: She had to get a New Jersey learner’s permit and could only drive when there was a licensed driver in the car. Me. She then needed to schedule a road test. Remember, my car was a stick shift, so she not only had to demonstrate her driving skills, but also had to demonstrate comfort with a standard shift. She passed and was complimented by the road test examiner.

The lesson I learned: “If you don’t ask, you don’t get.” In other words, do your due diligence. If I’d conducted proper due diligence on my wife’s license status, I would have known she didn’t have a valid driver’s license and I wouldn’t have let her drive my car.

The same lesson applies when you invest your money in a mutual fund. Do you understand the mission of the fund and its managers? Did you read the prospectus? Is this how you want your money managed? If not, you’ve got the wrong mutual fund.

The same would apply when buying Series I savings bonds. Do you know how long you need to let the money sit until there are no penalties for withdrawals? If you need your money back in the first five years, maybe inflation-indexed Treasury bonds are a better choice.

If you don’t understand a financial instrument you own, you can end up in a situation you weren’t expecting, like me letting my wife drive my car without a current license. Haven’t done your due diligence? If you later discover your hard-earned money isn’t being managed in the way you wanted, you have only yourself to blame.

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Surprised Again

"IT'S TOUGH TO MAKE predictions, especially about the future." That’s one of the more amusing quotes attributed to Yogi Berra, but there’s also a lot of truth to it. When it comes to financial markets, the track record of those making forecasts is not good.

That’s why a rational approach to decision making is to avoid predictions, and instead base choices only on an assessment of where things currently stand. But even that approach can be fraught: Financial trends have a habit of reversing when least expected.

Consider the recent trend in interest rates. Late last year, the Federal Reserve’s policymaking committee indicated its expectation to cut rates several times this year. On average, committee members predicted three rate cuts in 2024 and another four in 2025. Those expectations fueled a stock market rally at the start of this year. Through the end of March, the S&P 500 had gained more than 10%. It had also helped boost gold and other asset classes, while mortgage rates had begun to tick down, providing relief for the housing market.

Everything seemed to be on track—until 11 days ago, when the government issued its monthly inflation report. After several months of improvement, the March report showed inflation ticking up again. Speaking on Tuesday, Fed Chair Jerome Powell said out loud what investors feared: “The recent data have clearly not given us greater confidence [that inflation is moving lower] and instead indicate that it is likely to take longer than expected to achieve that confidence.” Powell added that the Fed is prepared to leave rates unchanged “for as long as needed.”

Not surprisingly, markets dropped in response. So far in April, the S&P 500 has given up 4.5%, and small-cap stocks—which are more vulnerable to rising rates—are down nearly 8%. And because bond prices move inversely to interest rates, bonds have also experienced losses, down 2.5% this month. In short, everything investors thought was true a month ago seems suddenly to have reversed.

Another reversal we’ve seen recently is in the electric vehicle (EV) market. Just a year ago, when Toyota CEO Akio Toyoda chose Koji Sato as his successor, the headlines excitedly focused on Sato’s commitment to EVs. Nikkei Asia’s headline declared, “Toyota's new chief Koji Sato vows to get serious about EVs.” Bloomberg’s headline read, “Toyota CEO Sees EVs as ‘Missing Piece’ for World’s Top Carmaker.”

Industry analysts agreed. CLSA analyst Christopher Richter argued that Akio Toyoda had been holding Toyota back: “Some of the statements that came out of Toyota when Akio Toyoda was CEO sort of made it sound kind of like hybrids are going to be there forever. No, it’s your standby, it’s your hedge. EVs have to be first.” Earlier this year, when Toyoda, who remains chairman, reiterated his longstanding belief in hybrids and skepticism of EVs, he was pilloried. An auto publication wrote that Toyota’s “hesitation with EVs could set it up for failure.”

For a time, most everyone agreed with this thinking. Despite Toyoda’s skepticism, EV sales were growing much faster than the overall industry, while hybrids looked like they were on their way out. Electric car leader Tesla’s stock doubled last year. But then everything changed. In the first quarter of this year, hybrid sales re-accelerated, growing 43% year-over-year, while EV sales barely grew, inching up just 2.7%. In an effort to boost slowing sales, Tesla was forced to cut prices several times, and last week announced it would be laying off 10% of its workforce. The company’s stock is down 40% this year. In short, everything investors thought they knew about this market a year ago seems to have changed.

Another area that’s seen a near-180-degree shift: the small-cap stocks that capture investors’ imagination. Where are 2021’s hot small-cap stocks today? Relative to their highs three years ago, AMC is down 94%, GameStop is down 91% and Zoom is down 85%. When they were going up, the rally in this group of stocks was reminiscent of the tech-stock rally of the late 1990s. With prices rising seemingly every day, investors were lulled into a sense of security—until suddenly, one day, it stopped.

Perhaps the most notable trend reversals have been in sentiment toward international markets. In the 1980s, Japan’s economy was so dominant that MIT professor Lester Thurow wrote a book titled Head to Head in which he questioned America’s ability to continue to lead the world economically. But when the Plaza Accord was signed in 1985, it triggered a series of events that eventually led to a decades-long economic slump in Japan.

For two decades in a row, Japan’s Nikkei stock market index lost 50% of its value and only recently reclaimed its prior high—after 34 years. As I described in January, a similar story now seems to be playing out in China. Its economy, which many worried was on track to surpass ours, has stumbled in a number of areas. It’s been a remarkable reversal.

Some years ago, the investment consulting firm Callan put together an illustration it dubbed the periodic table of investments. Callan’s objective was to communicate the unpredictability of investment markets. In ranking investments from best to worst each year, Callan’s chart clearly illustrates the sorts of reversals described above. In short, what it shows is that investment performance is rarely consistent. It’s not unusual to see asset classes that have delivered the best performance one year fall to last place the following year. In other words, there’s no consistent pattern to investment performance, and often—just when it looks like there’s a pattern developing—it reverses.

The challenge for investors, though, is that when a trend is underway, it can appear so firmly entrenched that it’s hard to imagine what could stop it, let alone reverse it. But as we’ve seen, that’s precisely when a reversal can occur. What’s the solution? One seemingly rational approach would be to adjust your portfolio when you observe changes in the market. Unfortunately, the data have shown that this approach rarely works, even for professional investors. A study by Morningstar concluded that funds pursuing these sorts of strategies “incinerated” shareholders’ returns.

What’s the alternative? Since reversals are a fact of life for investors—and are completely unpredictable in their timing and impact—the key, I think, is to structure your portfolio so you don’t need to make changes, no matter what the market does. You can do that by building enough diversification and enough margin for error into your portfolio so that a reversal in any one corner of the market can’t materially affect you—and, just as important, won’t cause you to lose any sleep. As I’ve discussed before, try to stay in the center lane.

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 on Threads, and check out his earlier articles.

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All About the Quest

OUR ANNUAL INTEREST and dividend income in 2024 will exceed my inflation-adjusted pay as a mailroom boy in 1961. Of course, back then, I earned a bit over minimum wage. It’s been a long journey.

Below are the daily net portfolio gains and losses for the third and fourth weeks of last month. These figures reflect our cash account, index and actively managed stock funds, corporate and municipal bond funds, two utility stocks and two variable annuities. The two annuities date from my 40s, when I was more vulnerable to sales pitches.

March’s third week: Monday +$8,661, Tuesday +$7,373, Wednesday +$10,850, Thursday +$2,796, Friday +$9,161. Overall, we were up $38,841 for the week.

March’s fourth week: Monday -$2,440, Tuesday -$2,777, Wednesday +$17,514, Thursday -$477. On Friday, the markets were closed. For the week, we ended up $11,820.

During the first week, every day was positive. Still, we didn’t do nearly as well as the S&P 500, but we shouldn’t expect to, given our investment mix. Interestingly, the majority of the gain on the Friday was from our two individual stocks.

I didn’t do as well the second week. On the Monday, our two individual stocks again gained, limiting our portfolio’s loss. Is this the power of diversification?

What does it all mean? Not much. You shouldn’t read too much into a portfolio’s daily performance, but it’s fun to see how far out of sync you may be with the markets.

In the first quarter, our total portfolio—including reinvestment of dividends and interest—increased 15%, while the S&P 500’s total return was almost 11%. Don’t get me wrong, no bragging here. I have no grand strategy. I didn’t do anything to earn that money.

Instead, the magic of the markets did all the work. Passive investing, they call it. In my case, it’s more like unconscious investing. I don’t analyze each piece of the pie. I just want the pie to grow.

Perhaps we did do something to earn this money or, at least, to amass our portfolio. The less visible part of the story is 62 years of investing, reinvesting and compounding interest. I can trace it all to 1961's payroll deductions of $25 a month to buy savings bonds and $5 a week for the employee stock purchase plan.

From the first day I started investing, I sought to become a millionaire. It seemed to be the traditional goal. Adjusted for inflation, I haven’t come close. Yes, I know accumulating money isn’t what life is all about. Instead, for me, the quest is the thing. If I knew how to use a spreadsheet, I’d generate a graph showing a steady increase in our net worth over many decades. I suspect the great majority of HumbleDollar readers could do the same.

I’m content to think of myself as an example of what’s possible with steady saving and investing over many years. If I can do it, just about anyone with patience can.

While I feel optimistic about our portfolio at the moment, I’ve been around long enough to know this is a rollercoaster and the next downward part of the ride is always coming. I just hope it’s a kiddie ride and diversification does its job.

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Fully Committed

IF YOU THINK IT'S irritating to debate an issue with folks who have already made up their mind, there’s one situation that’s even worse: debating an issue with those who have not only made up their mind, but also gone ahead and acted on their decision—especially if that decision is irreversible.

And, yes, many retirement decisions are irreversible.

Take issues such as when to claim Social Security, whether to take pension payments or a lump sum, whether to buy an income annuity, whether to opt for traditional Medicare or Medicare Advantage, and what age to retire at. Those who have already acted on their choice may be unable to reverse course or reversing might be awfully difficult—and that means these folks tend to be fully committed to their choice, both financially and emotionally. Consider six decisions:

1. Social Security. After you claim benefits, there are two potential chances to change your mind if you later decide you chose wrong. First, in the first 12 months, you can cancel benefits and repay what you’ve already received. Second, you can suspend benefits once you reach your full Social Security retirement age of 66 or 67, and thereafter collect delayed retirement credits until you restart benefits.

But I can’t recall hearing of anybody in recent years who’s used either option. Most folks, once they claim benefits, stick with their decision. Talking to folks who argue vociferously that everybody should claim benefits early? More likely than not, you’ll discover that’s what they did. It might have been the right choice for them. It almost certainly isn’t the right decision for many and perhaps most retirees.

2. Pensions. Got a choice between regular monthly pension payments and a lump sum? If you take the payments, it’s game over. If you take the lump sum, you can always opt to buy an income annuity later—though it doesn’t seem like that happens very often and, if folks do so, they may find the commercial annuity that they buy pays notably less income than the pension payments that their old employer was offering.

3. Income annuities. This is similar to opting for pension payments: It’s a decision that can’t be reversed, and I think that’s one reason immediate-fixed annuities aren’t popular. Still, unlike opting for the pension rather than the lump sum, the stakes are lower for those who buy income annuities.

How so? You could opt to make incremental annuity purchases over time. That’s what I plan to do, which will also give me the chance to buy my immediate-fixed annuities from multiple insurers, thus diversifying the risk that any one insurer gets into financial trouble. My goal: Between my Social Security and my immediate-fixed annuity payments, I want enough income to cover at least my fixed living costs, freeing me up to invest my portfolio largely or entirely in stocks.

4. Medicare. If you opt for a Medicare Advantage plan rather than traditional Medicare, you could later swap into traditional Medicare. The problem is, at that juncture, you may struggle to get the Medigap plan you want at a reasonable price, because you’ll likely have to go through medical underwriting. This could obviously be a problem, though it’s hard to gauge how big a problem it is. Some folks, at least, do manage to do it.

5. Reverse mortgages. Just because you set up a reverse mortgage doesn’t mean you have to start drawing on the money available to you. Indeed, some experts argue that retirees should set up a reverse mortgage as a financial backstop, and then leave the reverse mortgage’s credit line to grow. Even then, a reverse mortgage will involve hefty upfront costs, so—like opting for monthly pension payments or buying an income annuity—this feels like a big, irreversible decision, one that tends to prompt heated arguments.

6. Retiring. Now, we come to the biggest decision of all: retiring from your full-time job. Yes, many folks go on to work part-time. But such positions, while they may pay a handsome hourly rate, usually won’t generate the same amount of income and they typically don’t come with benefits.

If you later change your mind, could you get back your old full-time job? Probably not—which, I suspect, is why so many folks will argue that they retired at the right time. After all, it would be hard for most people to admit they made a mistake when it comes to such a big decision. It’s much easier to persuade ourselves that we made the correct choice.

To make matters worse, not only are the above decisions often irreversible, but also the financial stakes are huge. An additional problem: We often only get to make these decisions once, so we have scant chance to develop any real expertise, and it’s hardly surprising that folks make mistakes.

The bottom line: When you talk to friends and family members about these issues, always ask what they opted to do. If they’ve already acted, they’re likely heavily invested in their own decision and loath to admit any other choice would have been better. What if they allow that perhaps they made a mistake? Now, it’s worth listening—because you’re talking to folks who are thoughtful enough to critique themselves.

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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