Jonathan Clements's Blog, page 86

Frugal but Foolish

JEFF WAS A NEW engineer who began his nuclear power career a couple of decades ago as part of my group. He’d graduated from a middling engineering school with a stellar grade point average. Quiet, though not shy, he had a serious demeanor.

Jeff had a goal of purchasing a house as soon as possible. Needless to say, this was a tall order for someone just starting his career. He lived a spartan lifestyle, trying to quickly amass as much money as possible for a down payment.

Two examples of his extreme frugality stand out in my memory. First, he favored buying expired food at a deep discount to keep his grocery bills low. One time, I noticed him eating yogurt that was a couple of weeks past its due date.

Second, he parked in the outer lot, far away from our office. As an in-house employee, he was permitted to park in the inner lot, close to our building. But he chose not to. I knew a few people who, on occasion, would purposely park in the outer lot to get some exercise with the longer walk to the office. That wasn’t Jeff’s motivation. Rather, he wanted to save money on gas by not driving the extra several hundred yards to the inner lot. A back-of-the-envelope calculation suggested this ritual saved him at most three cents on gas each day.

I think Jeff might have been used to being a big fish in a small pond at school. Despite being a star at his college, his work performance in our group was nothing remarkable. I don’t think he was accustomed to getting critical feedback.

A brilliant and experienced engineer named Wes was assigned to be his mentor. Wes’s career with the company spanned more than three decades. He had a lot of important projects under his belt. Wes possessed a keen attention to detail and was an excellent writer. The first time Jeff gave something to Wes for review, it came back covered with red ink.

Jeff was not a happy camper. He unloaded to me, complaining about how unreasonable and annoying Wes was. I mostly just listened. But in the back of my mind, I recalled my own experience with Wes. As a fairly senior engineer, I often didn’t get many significant comments. Still, for one important document, Wes had been assigned as my reviewer. I got the draft back with red ink all over it.

My initial reaction was a bit of frustration mixed with denial—until I carefully read the comments. I realized that, in each case, his comments were valid. He pointed out things I hadn’t thought about and even corrected my writing in a couple of instances. I swallowed my pride, addressed his concerns and ended up with a better product. I gained a deeper respect for Wes’s abilities.

The dynamic between Jeff and Wes got worse as time went on. When updated versions of his document continued to have red ink on them, Jeff’s anger deepened. Although Wes was a consummate professional, Jeff seemed to take the feedback personally.

Jeff’s frustration with Wes as a mentor, and the nuclear power industry’s super-exacting way of doing business, got to a point where he realized the industry wasn’t for him. After two years, he found a job in a different field and put in his two weeks’ notice. He was a year shy of getting vested in his pension, which probably would have been worth in the neighborhood of $10,000. During his last week, I asked him what he planned to do with his 401(k) balance. His answer stunned me.

Jeff had not participated in the company’s 401(k) plan. For two years, he missed out on receiving a 100% company match on 5% of his salary—probably at least $6,000 in free money. I found it difficult to believe that my uber-frugal colleague had left this kind of money on the table. He shrugged off the loss.

The point here is not to pick on Jeff. I’ve made plenty of mistakes in my day. The financial lesson illustrated here is that often we tend to focus on things that matter little, while neglecting considerations of far greater consequence.

As I wrote in a previous article, saving a bit of money on groceries is a fun pastime for me. Still, in the grand scheme of things, the money I’ve saved with those efforts is dwarfed by the opportunities I’ve missed by playing it safe and holding too much in cash investments.

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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Make Them Answer

MANY HUMBLEDOLLAR readers are the financial experts that friends and family members rely on. But how can you best help those around you? Below is an edited excerpt from the 10th anniversary edition of “ A More Beautiful Question .”

We all like to give advice—it feels good. “When you’re giving advice, you’re in control of the conversation,” notes the author and executive coach Michael Bungay Stanier. “You’re the one with the answers.”

But people who are experts at using questions to build rapport will tell you: resist the urge to dole out advice. You may be trying to be helpful. But the truth is, people’s advice often isn’t as good as they think it is.

The advice giver may not know enough about what’s going on in a situation—the history, the context—and may be trying to solve a problem that isn’t the real problem. And advice givers have their own biases, experiences and beliefs about how to deal with a given situation—which means the advice might make sense for them, but not necessarily for the recipients.

What’s the alternative? Rather than handing people what you think is “the answer,” it’s preferable to help them find their own answer—and one way to do that is through a combination of listening and asking questions that gently probe and guide. The model for this type of interaction is used by many therapists, life coaches, consultants and more thoughtful financial planners. Good therapists, in particular, don’t tell you what to do. Instead, they lead you on a path to figuring it out for yourself.

If you can help folks to think about a problem more clearly and gently guide them in the direction of possible solutions, you’re leaving room for them to arrive at their own insights and make their own decisions, so that they have more “ownership” of potential solutions. Think about it: Which portfolio are investors more likely to stick with during a bear market, the one they picked themselves—or the one they were told they ought to buy?

What follows is an example of how to gently guide others, as shared by Hal Mayer, executive pastor and leadership trainer at the Springs Church in Ocala, Florida. Mayer was coaching a woman who needed to attract more volunteers to help in her parish. He started by asking her what she hoped to achieve. Her goal: attracting 10 new volunteers.

Mayer next asked, “What have you tried?” She mentioned past efforts to recruit volunteers that hadn’t worked. He then asked this question: “If you could try anything and money was not an object, what would you do to find new volunteers?”

The woman came up with the idea of offering people $100 to volunteer. Mayer made note of that and asked, “And what else?” With each subsequent idea she shared, he followed up by asking for another idea, and then another.

By the way, “and what else”—the AWE question, as Bungay Stanier calls it—is one of the simplest and most effective follow-up questions you can ask. It nudges people to go beyond top-of-mind answers and elicits more, and usually better, ideas and insights. It encourages the process of “thinking out loud” about a challenging subject.

After drawing out a few ideas and jotting them down, Mayer then showed the list to the woman and asked: “Which one of these most interests you—which one would you like to discuss further?” She chose an idea about setting up a lemonade stand at which kids could hand out applications to volunteer.

Mayer then asked several practical questions about that idea: “How would you set it up? What would you need to get started? What problems might get in the way of this idea? What are the first steps you can take, right away?” By the time he was finished with the conversation—which took less than 20 minutes—the woman had a plan of action and was ready to begin in a few days.

As Mayer points out, he didn’t pass judgment on any of her ideas or try to tell her how to proceed. “All I did,” he says, “was ask her questions to help her draw focus.”

While Mayer’s conversation was about finding volunteers, it’s easy to imagine a similar line of questioning if you were talking to a friend about getting out of debt, finding more money to save each month or getting his or her financial affairs organized.

One of the important things Mayer did midway through the conversation was to solicit multiple ideas using the AWE question. The favorite idea, about the lemonade stand, wasn’t the first or even the second idea mentioned by the woman. It had to be drawn out with follow-up questioning.

The approach Mayer took here is similar to an established technique used by psychologists called “motivational interviewing.” It was initially used to help people struggling with alcohol abuse. Today, psychologists use variations of it to help patients deal with all kinds of issues. The technique is based around asking open-ended questions to identify why and how someone might wish to make a difficult change in his or her life.

Then, the questioner uses “reflective listening” (similar to paraphrasing) to move the conversation forward, clarify the person’s thoughts, and provide affirmation. It ends with summarizing the conversation and asking about possible next steps the person could take to begin to make actual changes.

You don’t have to be a psychologist to use motivational interviewing. William R. Miller, one of the pioneers of the practice and co-author of the book Motivational Interviewing, offers a simplified version you can try with a friend, family member or co-worker. If folks you know are considering making a change in their life—perhaps buying a larger home, purchasing a vacation property or changing jobs—try asking the questions below and “just listen carefully to their answers,” Miller says.

Why do you want to make this change?
If you did decide to do this, how could you go about it so you succeed?
What would you say are the three best reasons for you to do it?
On a scale from zero to 10, where zero means “not at all important” and 10 means “extremely important,” how important is it for you to make this change? What number would you say? And why that number?

“Listen well without interrupting or giving any opinion or advice,” Miller says. “Then give the person a summary of what they said. Finally, ask, ‘So what do you think you’ll do?’ And again, just listen.”

Motivational interviewing has proven very successful over the years—and the key to its success may come down to one basic concept, an idea expressed several centuries ago by the French philosopher Blaise Pascal: “People are generally better persuaded by the reasons which they have themselves discovered than by those which have come into the mind of others.”

Warren Berger is the author of a handful of books, including the bestseller " A More Beautiful Question ." His wife Laura E. Kelly also writes occasionally for HumbleDollar. They live in Mount Kisco, New York.

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My Newest Nemesis

YOGI BERRA IS MY favorite guru. His quip, “It ain’t over till it’s over,” pretty much sums up my losing battle with technology stocks.

The saga all began with an upbringing that bred a need for achievement that could never be satisfied, coupled with a prohibitive anxiety over risk-taking and failure. This family tape has played over and over again in my head as I’ve struggled to steer a course as a mutual and exchange-traded fund investor. During the lurching but inexorable bull market of my young adulthood, I would hide out in bond, balanced and option-income funds, on the outside looking in.

I’ve been feuding with technology stocks for decades. In the late 1970s, I dabbled in T. Rowe Price New Horizons (symbol: PRNHX), which invests in emerging companies on a high-growth-at-a-reasonable-price basis. But it’s not a dedicated technology fund.

Then came 1980, when investors anticipated the election of business-friendly Ronald Reagan and drove the S&P up a raucous 32%. I was flush with my New Horizons success and brimming with overconfidence as Fidelity Investments launched its suite of sector funds in 1981.

I was the perfect patsy, redeeming my New Horizons shares and plowing the proceeds into shiny new Fidelity Select Technology (FSPTX) to ride out the raging bull without a saddle. Soon enough, I bailed out of my tech fund at the behest of those old demons—need for achievement and anxiety—cleverly sidestepping 20%-plus gains in each of the next two years.

I had to concede that my fear of failure doomed me to being a lousy trader, while the writings of Eugene Fama and later Jeremy Siegel brought home the logic and power of long-term investing in the broad stock market. What to do? Where to go?

My solution has been to invest primarily in index funds, but with tech stocks underweighted. According to Morningstar’s X-Ray tool, my family’s combined portfolio has 21% tech exposure, versus the S&P 500’s 31% weighting. Given the strength of technology stocks since my “conversion,” I’ve moderately underperformed the market. On the one hand, my conservative stance has allowed me to stay invested and still get a large slice of the market’s gain. On the other hand, I’ve always thought my success with funds has fallen well short of my knowledge about them.

Enter the artificial intelligence mania and my newest nemesis, Nvidia (NVDA). I hate that stock. For goodness sake, it was up 240% last year, and has continued to soar in 2024. According to Morningstar, my combined position in Nvidia is 1.9%. Are you kidding me? That’s all, less than 2% in a company with a blockbuster future and a stock on steroids?

Now, don’t all you fellow broad index-fund investors guffaw over my piddling allocation to Nvidia. You’ll find that even Vanguard Group's S&P 500-index fund (VFIAX) holds just a 5.1% position in the stock. That’s more than twice my participation and quite sensible in a highly diversified portfolio. But it’s certainly a very tepid stake in a company touted as the technology revolution’s next bellwether stock.

You probably see where I’m going. That family legacy—unreasonable achievement demands along with heightened anxiety—make me a sucker for FOMO, or fear of missing out. Disguising that fear as innocent curiosity, I did a little research on VanEck Semiconductor ETF (SMH), a zippy little sector fund that has a 20% exposure to Nvidia. To my credit, I’ve so far abstained. But pray for my deliverance.

Then, just recently, my good friend Jerry told me a story that sounded alarm bells. His wife Judy bought a Tesla during the 2022 Christmas holiday, just about the same time she discovered CNBC.

Titillated by both her politically correct car and a bullish commentator, she stashed $200,000 in Tesla (TSLA). Carried in part by last year’s raging bull market, the stock doubled and Judy sold for $400,000. CNBC became her divine source, the pundits were oracles and she was a star trader. In the words of market observer Nassim Nicholas Taleb, Judy was fooled by randomness.

Now devoted to CNBC, she’s informed Jerry she wants to put the whole $400,000 into Nvidia. Almost half a million in one stock? What if the artificial intelligence story proves to be overblown? Suppose the company’s earnings disappoint and the stock no longer warrants its giddy price tag? Might it be struck by one of Taleb’s black swans, like corporate malfeasance or product liability. What if the company is overtaken by Advanced Micro Devices (AMD), its primary competitor?

I warned Jerry about the riskiness of his wife’s plan—a warning that, I hope, was driven more by my concern for their finances than any fear that Judy scores another windfall while I dawdle in diversification. I beseeched Jerry to stand firm against his wife’s plan and, if that fails, perhaps get her to compromise with VanEck Semiconductor, while lightening up on their other technology exposure.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

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Headache for Rent

FOR THE PAST SIX years, we’ve rented a house in Florida for a month or so. We used VRBO, and all went well. Even minor problems with a house were quickly addressed by the owners or their rental agents.

Not this year.

In September 2023, we rented a condo on the beach in Hillsboro Beach for February 2024. In December, I received an e-mail from the rental agent, Houzlet, Inc., saying the owner had financial problems and was selling the place, and thus all reservations were cancelled. I was offered a few other places, none of which was acceptable, so I requested a refund of my $5,000 deposit.

I received an e-mail from Houzlet confirming I’d receive the refund within 45 days. You guessed it, time goes by and no refund. Repeated calls to customer service went nowhere. I received repeated promises my refund was on the way. Customer service wouldn’t give me anyone else to speak with. All I heard was that they’d advise the accounting department. Weeks went by and still nothing happened.

I called VRBO and explained it all, and also pointed out the firm was the agent for this rental. The phone rep promised to escalate the matter. Bottom line: After repeated e-mail requests, VRBO never got back to me again and did nothing to help. It appears VRBO has little, if any, oversight over who posts rentals on its site. VRBO did, however, refund its booking fee within a few days of the cancellation.

Now, I was getting mad. I started researching Houzlet. I found many other similar complaints with virtually the same story as mine, except more money was involved in some instances. Many cases were reported in detail to the Better Business Bureau—in fact so many that the site has added this alert:

“According to BBB files, this business has a pattern of complaints concerning service issues. Consumers state their bookings were cancelled by Houzlet and in some cases, they were offered to re-book at higher priced properties. Consumers indicate that they want their original booking fees refunded in full. On January 26, 2024, BBB sent written notice to Houzlet, Inc. identifying the pattern of complaints with a request for a business response. As of February 23, 2024, we have received no response from Houzlet, Inc. BBB will continue to monitor and update the company's report as needed.”

Did we get our money back? We did. Thanks to my wife, we were once again saved from financial disaster. “Call the bank,” she said. Why didn’t I think of that? I reported what I called a fraudulent charge.

The bank immediately applied a full credit to my credit card. A few days later, the bank sent me a letter saying Houzlet had 45 days to contest the credit. Not surprisingly, it never did and the bank confirmed the credit was made permanent. But by then, we were on our way home from Florida after spending a month in a hotel, because we couldn’t find another suitable rental.

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French Connection

IN APRIL 1985, SENIORS in my high-school French program returned from a week in Paris and two in a La Rochelle lycée. They shared photos of the class in front of the Eiffel Tower. They detailed differences between French and American high schools. And they rhapsodized about the mighty U.S. dollar.

“France is dirt cheap.” The speaker extracted a Sony Walkman from her backpack. “This cost $30 less than it does here.”

I sat up. In two years, I’d take the same trip. The chance to capitalize on American dollars in a metaphorical French flea market was at least as exciting as the chance to eat frogs’ legs and see the Mona Lisa.

In March 1987, when our plane touched down in Paris, I pulled grubby bills from my pocket, rubbed them between my fingers, and turned to my seatmates. “It’s party time, friends.”

But the party never started.

Between 1985 and my 1987 arrival in France, finance ministers from France, Japan, the U.K., the U.S. and what was then West Germany convened in New York City to negotiate The Plaza Accord. Their objective: reduce the value of the U.S. dollar, whose strength was producing unsustainable imbalances in global trade.

They succeeded. In 1985, a U.S. dollar bought 10 French francs. Two years later, it bought six, a 40% decline in the purchasing power of my U.S. bills.

In Paris, I visited Galeries Lafayette, an art deco temple of commerce on Boulevard Haussmann. I found the Sony Walkman, pressed play. French pop rattled around my head. I checked the price and did the exchange-rate math.

The Plaza Accord had exterminated the French flea market.

Since 1992, when I first enrolled in a retirement plan, the dollar’s post-Plaza Accord collapse has shaped my approach to asset allocation. I invest 30% of my assets in non-U.S. companies and currencies, a hedge against the dollar’s decline and a wager that great companies exist beyond U.S. borders. Research makes a strong case for international diversification.

Not everyone buys it. In the 1990s, I worked for Jack Bogle, Vanguard Group’s founder and proudly provincial skeptic of international investing. “The reality is that we do better than the rest of the world,” Bogle told InvestmentNews in 2017. “You don’t need currency risk, but if you want, don’t go over 20% in international.”

He continued: “What are you buying in non-U.S.-stocks? The largest country in EAFE [developed non-U.S. markets] is Britain; the second-highest, Japan; and the third is that soul of hard work, France. I can’t see that I’d make more money in Britain, with Brexit; or Japan, a very structured, aging economy—or France, where they couldn’t pass a law saying you had to work 35 hours a week.”

Since I started investing, $1 in U.S. stocks has grown to $20.91, as shown in the accompanying chart, while $1 in non-U.S. developed markets has grown to $5.35. A mix of 70% U.S. stocks and 30% non-U.S. stocks (roughly my allocation) has turned $1 into $14.50.

I’ve chuckled at Bogle’s Yankee chauvinism. (He had a great sense of humor.) But I’ve never acted on it. Markets move in unpredictable cycles. Maybe the next 30 years will be different from the past 30. Maybe not. Diversification means you always have exposure to the best performers and the worst.

But I like the idea of holding assets denominated in different currencies—a preference picked up in the electronics section of a French department store in 1987.

Andy Clarke is a financial writer and editor in Pennsylvania. He worked for three decades in investment communications and research. Andy is a CFA® charterholder and CFP® certificant. He blogs sporadically at TheSecondPaycheck.com .

The post French Connection appeared first on HumbleDollar.

French Connection

IN APRIL 1985, SENIORS in my high-school French program returned from a week in Paris and two in a La Rochelle lycée. They shared photos of the class in front of the Eiffel Tower. They detailed differences between French and American high schools. And they rhapsodized about the mighty U.S. dollar.

“France is dirt cheap.” The speaker extracted a Sony Walkman from her backpack. “This cost $30 less than it does here.”

I sat up. In two years, I’d take the same trip. The chance to capitalize on American dollars in a metaphorical French flea market was at least as exciting as the chance to eat frogs’ legs and see the Mona Lisa.

In March 1987, when our plane touched down in Paris, I pulled grubby bills from my pocket, rubbed them between my fingers, and turned to my seatmates. “It’s party time, friends.”

But the party never started.

Between 1985 and my 1987 arrival in France, finance ministers from France, Japan, the U.K., the U.S. and what was then West Germany convened in New York City to negotiate The Plaza Accord. Their objective: reduce the value of the U.S. dollar, whose strength was producing unsustainable imbalances in global trade.

They succeeded. In 1985, a U.S. dollar bought 10 French francs. Two years later, it bought six, a 40% decline in the purchasing power of my U.S. bills.

In Paris, I visited Galeries Lafayette, an art deco temple of commerce on Boulevard Haussmann. I found the Sony Walkman, pressed play. French pop rattled around my head. I checked the price and did the exchange-rate math.

The Plaza Accord had exterminated the French flea market.

Since 1992, when I first enrolled in a retirement plan, the dollar’s post-Plaza Accord collapse has shaped my approach to asset allocation. I invest 30% of my assets in non-U.S. companies and currencies, a hedge against the dollar’s decline and a wager that great companies exist beyond U.S. borders. Research makes a strong case for international diversification.

Not everyone buys it. In the 1990s, I worked for Jack Bogle, Vanguard Group’s founder and proudly provincial skeptic of international investing. “The reality is that we do better than the rest of the world,” Bogle told InvestmentNews in 2017. “You don’t need currency risk, but if you want, don’t go over 20% in international.”

He continued: “What are you buying in non-U.S.-stocks? The largest country in EAFE [developed non-U.S. markets] is Britain; the second-highest, Japan; and the third is that soul of hard work, France. I can’t see that I’d make more money in Britain, with Brexit; or Japan, a very structured, aging economy—or France, where they couldn’t pass a law saying you had to work 35 hours a week.”

Since I started investing, $1 in U.S. stocks has grown to $20.91, as shown in the accompanying chart, while $1 in non-U.S. developed markets has grown to $5.35. A mix of 70% U.S. stocks and 30% non-U.S. stocks (roughly my allocation) has turned $1 into $14.50.

I’ve chuckled at Bogle’s Yankee chauvinism. (He had a great sense of humor.) But I’ve never acted on it. Markets move in unpredictable cycles. Maybe the next 30 years will be different from the past 30. Maybe not. Diversification means you always have exposure to the best performers and the worst.

But I like the idea of holding assets denominated in different currencies—a preference picked up in the electronics section of a French department store in 1987.

Andy Clarke is a financial writer and editor in Pennsylvania. He worked for three decades in investment communications and research. Andy is a CFA® charterholder and CFP® certificant. He blogs sporadically at TheSecondPaycheck.com .

The post French Connection appeared first on HumbleDollar.

Make That Choice

I'M NOT THE SMARTEST guy. That used to bother me when I was in school. The smart guys were making their teachers happy. They were named to the National Honor Society. They went to the best colleges. They seemed to have it all.

As I got older, and began to make more and more decisions on my own, I had to come up with a method that would allow me to make good decisions, given the limited gray matter I was working with. My strategy: I like to narrow down my choices, identify the key variables, avoid decisions with really bad potential outcomes—and then get on with my life.

Remember, every decision comes with risk—the risk of being wrong—and every decision will lead to an outcome, good or bad. The first thing I do is settle on my priorities. What am I trying to achieve? I then think about the options available to me, and try to narrow that list. I believe limiting choice reduces anxiety. If there are fewer choices to consider, it’s also easier to study each choice and make a good decision.

Among the choices I’m considering, I think about what’s the worst that could happen if I chose one option over another—and I then avoid the one with the worst possible outcome. What if the choices seem pretty much equal? I don’t worry too much about which one I choose.

I once spoke with a guy who was affiliated with my employer. He was trying to decide how to spend his money. He said his options were to buy a new truck or remodel his home. I asked him which would be best for his relationship with his wife. He chose the remodeling project. Identifying the most important variable is the key to making good decisions.

When my son was young, I decided I needed life insurance, so my wife and son would be okay financially if I died suddenly. That was my priority. The two main types of life insurance are term and whole life. Term-life insurance provides only a death benefit, has far lower premiums and is designed to provide coverage for a limited period of time, perhaps 15 or 30 years.

Meanwhile, whole-life policies provide a death benefit coupled with an investment account. These policies are designed to provide coverage for your whole life—hence the name—but the premiums are far higher. I chose term, which provided what I needed, or so I thought.

Under normal circumstances, once your children reach adulthood, they can make it on their own and they no longer need the financial support that life insurance might provide, so term-life insurance works well. But if you have special needs children, they might never be able to make it on their own. They’ll always need your financial support—including your financial support after your death.

As my son got older, it became evident his disability wasn’t going away. Once I realized that, I also realized whole-life insurance would have been a better choice. But by then, it would have been prohibitively expensive to buy a whole-life policy.

As a substitute, I opted to fund a Roth IRA. That also allowed me to achieve my goal. Under current rules, when you bequeath a Roth, the beneficiaries won’t owe any income taxes, just like the beneficiaries of a life insurance policy. I’ve earmarked my Roth IRA dollars for my son, so there will be a pool of tax-free money to help support him after my death.

I keep hearing lately about the “tax time bomb” that’ll be triggered when I take required minimum distributions (RMDs) from my traditional IRA. One solution touted is to convert my traditional IRA dollars to Roth dollars prior to starting RMDs, so I’ll never need to pay income taxes on those dollars again.

But while I have my Roth dollars earmarked for my son, I also need some IRA dollars for me to spend during my lifetime. That’s another priority for me. I’m happy to pay taxes on those traditional IRA dollars along the way, rather doing a big Roth conversion now and getting hit with a big tax bill.

Like Henry Ford, who was famous for making decisions and then sticking with them, my decisions on my Roth and traditional IRAs are made, and I’m not changing them. Good or bad, the choices have been made. Now, I can move on to other decisions.

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.

The post Make That Choice appeared first on HumbleDollar.

Make That Choice

I'M NOT THE SMARTEST guy. That used to bother me when I was in school. The smart guys were making their teachers happy. They were named to the National Honor Society. They went to the best colleges. They seemed to have it all.

As I got older, and began to make more and more decisions on my own, I had to come up with a method that would allow me to make good decisions, given the limited gray matter I was working with. My strategy: I like to narrow down my choices, identify the key variables, avoid decisions with really bad potential outcomes—and then get on with my life.

Remember, every decision comes with risk—the risk of being wrong—and every decision will lead to an outcome, good or bad. The first thing I do is settle on my priorities. What am I trying to achieve? I then think about the options available to me, and try to narrow that list. I believe limiting choice reduces anxiety. If there are fewer choices to consider, it’s also easier to study each choice and make a good decision.

Among the choices I’m considering, I think about what’s the worst that could happen if I chose one option over another—and I then avoid the one with the worst possible outcome. What if the choices seem pretty much equal? I don’t worry too much about which one I choose.

I once spoke with a guy who was affiliated with my employer. He was trying to decide how to spend his money. He said his options were to buy a new truck or remodel his home. I asked him which would be best for his relationship with his wife. He chose the remodeling project. Identifying the most important variable is the key to making good decisions.

When my son was young, I decided I needed life insurance, so my wife and son would be okay financially if I died suddenly. That was my priority. The two main types of life insurance are term and whole life. Term-life insurance provides only a death benefit, has far lower premiums and is designed to provide coverage for a limited period of time, perhaps 15 or 30 years.

Meanwhile, whole-life policies provide a death benefit coupled with an investment account. These policies are designed to provide coverage for your whole life—hence the name—but the premiums are far higher. I chose term, which provided what I needed, or so I thought.

Under normal circumstances, once your children reach adulthood, they can make it on their own and they no longer need the financial support that life insurance might provide, so term-life insurance works well. But if you have special needs children, they might never be able to make it on their own. They’ll always need your financial support—including your financial support after your death.

As my son got older, it became evident his disability wasn’t going away. Once I realized that, I also realized whole-life insurance would have been a better choice. But by then, it would have been prohibitively expensive to buy a whole-life policy.

As a substitute, I opted to fund a Roth IRA. That also allowed me to achieve my goal. Under current rules, when you bequeath a Roth, the beneficiaries won’t owe any income taxes, just like the beneficiaries of a life insurance policy. I’ve earmarked my Roth IRA dollars for my son, so there will be a pool of tax-free money to help support him after my death.

I keep hearing lately about the “tax time bomb” that’ll be triggered when I take required minimum distributions (RMDs) from my traditional IRA. One solution touted is to convert my traditional IRA dollars to Roth dollars prior to starting RMDs, so I’ll never need to pay income taxes on those dollars again.

But while I have my Roth dollars earmarked for my son, I also need some IRA dollars for me to spend during my lifetime. That’s another priority for me. I’m happy to pay taxes on those traditional IRA dollars along the way, rather doing a big Roth conversion now and getting hit with a big tax bill.

Like Henry Ford, who was famous for making decisions and then sticking with them, my decisions on my Roth and traditional IRAs are made, and I’m not changing them. Good or bad, the choices have been made. Now, I can move on to other decisions.

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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Almost True

LAST WEEK, I DISCUSSED a key challenge in personal finance: In an endeavor where we’d expect facts and logic to drive decisions, we instead find that misconceptions and misunderstandings often take hold. In my previous article, I outlined five common financial myths. Below are five more:

1. “When a company’s doing well, its stock should go up.” Benjamin Graham, the father of investment analysis, was famous for the way he explained stock market behavior: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” In other words, share prices don’t behave consistently. That’s a big part of what makes the market so maddening.

Let’s start with Graham’s weighing machine. Look at a long-term chart of a market index like the S&P 500, and you’ll see what he meant. Stock prices, over time, increase more or less in line with corporate profits. It’s not a perfect relationship, but share prices do weigh the facts fairly accurately.

Look at a chart covering a shorter period of time, however, and it’s a different picture. Sometimes, stock prices follow profits. But just as often, prices seem to rise too high or fall too low. That’s because market sentiment—driven by the news of the day—often gets in the way of the tidy relationship between companies’ profits and their stock prices. In the short run, the stock market is more like a popularity contest.

The bottom line: You should feel good about investing in the stock market for the long term and never be discouraged by the short-term irrational behavior that it sometimes exhibits.

2. “I’ll earn more on a bond with a higher interest rate.” Suppose you’re choosing between two bonds, one that pays 3% and another that pays 5%. Which would you choose? The answer depends on what that 3% and 5% represent. There are two interest rates that matter to a bond—its coupon rate and its yield—and it’s important to know the difference.

The coupon rate is the interest rate stated on the bond. If a coupon is 3%, for example, then a $1,000 bond will pay an investor $30 each year. A bond’s yield, on the other hand, is a function of three factors: the coupon rate, the price at which the bond is purchased and the time remaining until maturity. When these three factors are combined, the yield on a bond can end up being higher or lower than its coupon rate.

Consider a $1,000 bond with a 3% coupon and one year to maturity. Because rates on new bonds are closer to 5%, you’d likely be able to purchase this 3% bond for less than face value. Let’s say you can buy it for $980. What will you earn? The coupon is the easy part: That’s $30. But when this bond matures, you’ll earn another $20. That represents the $1,000 face value you’ll receive at maturity minus your purchase price of $980. Put these two together—$30 plus $20—and your total return would be $50. Since your purchase price was $980, your yield would be $50 divided by $980, or 5.1%.

That 5.1% is known as a bond’s yield to maturity. Because it represents the total return an investor will earn, it’s the most relevant figure for bond investors. By contrast, a bond’s coupon rate can be quite misleading.

3. “Life expectancy figures are reliable for financial planning.” Search online for the term “life expectancy in the United States,” and you’ll find these numbers: Males born today can expect to live to about age 77 and women a few years longer. But those numbers are misleading because they refer only to the expected lifespan at birth. Morbid as it sounds, your own life expectancy increases over time as you outlive other people. As HumbleDollar’s editor notes, this phenomenon applies to men in particular, who are more accident-prone during their teens and 20s.

The differences between life expectancy at birth and life expectancy later in life can be significant. Men who make it to age 65, for example, can expect to live another 17 years to age 82—far longer than their life expectancy at birth. Women can expect to live almost another 20 years—to age 85. This dynamic is important to keep in mind as you make decisions that hinge on life expectancy, such as when to claim Social Security or whether to choose the survivor option on a pension or an annuity.

4. “Risk and return go together.” This view is so widespread that it’s virtually unquestioned. That’s for two reasons. First, it makes intuitive sense, aligning with the concept that “there’s no free lunch.” If an investor wants higher returns, he needs to “pay” for that privilege, and the way he pays is by assuming more risk. Similarly, if an investor wants to enjoy a less risky portfolio, it seems appropriate that he would have to “pay” for that security in the form of lower returns.

The second reason the risk-return relationship is accepted as an investment truism: It’s a foundational element of Modern Portfolio Theory—a concept that’s earned multiple Nobel prizes. In his first paper on the topic, in the early 1950s, Modern Portfolio Theory’s creator, Harry Markowitz, drew a straight line to illustrate how risk and return were so clearly correlated. Later in the 1950s, William Sharpe, another key contributor to Modern Portfolio Theory, dubbed this the Capital Market Line. That helped cement the risk-return tradeoff in investors’ minds.

This tradeoff, however, is what comedian Stephen Colbert would call “truthy”—on the surface, it sounds like it makes sense, but it falls apart on closer examination. That’s because risk is difficult to quantify. Consider two well-known companies: Apple and Amazon. Both are far ahead of their competitors. Their products are ubiquitous, and they have hundreds of billions in annual revenue.

But as we’ve seen with other technology leaders, from Xerox to Polaroid to BlackBerry, no company is invincible. For Apple and Amazon, how could you possibly quantify this risk? My view is that it’s impossible. Risk simply can’t be distilled down to a number. And if that’s the case, then—despite the intuitive appeal—it’s impossible to try to quantify any connection between risk and return.

5. “Whole life insurance is an overpriced financial product that should be avoided.” The challenge with permanent life insurance products is that they tend to be weighed down by high costs and complexity. They can also carry tax consequences if they aren’t handled carefully. For these reasons, they don’t have the best reputation and aren’t, in my view, appropriate most of the time. But there are situations in which they can serve a purpose.

Suppose you’re the owner of a business large enough that it might trigger estate taxes when you die. A whole life policy could help, allowing your children to pay the tax without having to sell the business. Similarly, as a business owner, you might want whole life coverage if there’s a buy-sell agreement with a partner. The life insurance would be there to ensure the surviving partner could be bought out.

In short, permanent life insurance can help play a role any time a large lump sum is certain to be needed at the end of life, no matter how many years in the future that might be. That’s in contrast to term coverage, which is designed to protect against a different risk: an untimely death during a fixed period of time.

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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Where It Goes

I HAVE ONLY A VAGUE idea of how much I spend. I figured it was time to find out.

I’ve never budgeted because I've never seen the need. From my early 20s until three-plus years ago, I kept an iron grip on my wallet, spending with the utmost care and saving great heaps of money. Over those 35 years of fierce frugality, I don’t feel like I deprived myself, but I do feel like I thought about money far too much—and tracking my spending would only have made that worse.

But now retirement looms, though I haven’t yet decided when I’ll retire or, indeed, if I’ll ever fully retire. Still, it strikes me that the point has arrived when it would be useful to know how much I spend, especially as I’ve recently been spending more than ever.

To get a handle on where my dollars go, I scrolled through three months of credit card statements and check book entries. What did I learn? Let’s start with fixed living costs.

It looks like our utilities run around $4,800 a year if I combine water, gas, electricity, cellphone and internet, while our 2024 property taxes are $5,800. Random Amazon orders, which include cleaning products, toilet paper, streaming services, specialty foods and so on, add another $3,000.

Groceries and wine come to some $12,000 a year, though that’s the least accurate number here. We live two blocks from two small supermarkets, and it seems Elaine or I pick up at least a few items almost every day. That means that every month we each amass a slew of relatively small credit card charges. Meanwhile, insurance—homeowner’s, flood, umbrella liability, health, vision and dental—amounts to $10,300 a year, with health insurance accounting for two-thirds of that total.

Add it all up, and we’re looking at close to $36,000 a year. Throw in other expenses—clothes, shoes, hair, gym fees, bicycle repairs, home maintenance, taxis, cosmetics and other costs incurred individually by Elaine and me—and the total annual tab rises to maybe $45,000.

You’ll notice I haven’t mentioned three key expenses. Housing and car costs account for half of the typical U.S. household’s spending, but we have neither a car nor a mortgage. What about a third key expense, income taxes? That all depends on how much we earn, so—while it’s a regular cost—it’s far from fixed.

No doubt I’ve missed a few items. Still, it strikes me that our everyday expenses are far from extravagant, which isn’t surprising, given that we have no car and no mortgage. I’ve long believed there’s great virtue in holding down fixed living costs.

Not only does that reduce money stress, but also it’s been the key to my financial success—far more than, say, owning index funds or tilting heavily toward stocks. Modest fixed living costs were the reason I was able to save prodigious sums throughout my career.

Some claim you need 80% or even 100% of your preretirement income to retire in comfort. Based on our fixed living costs, that’s not true for me—unless the benchmark is how much I earned at age 27, the year I started at The Wall Street Journal. In fact, our everyday living expenses will be easily covered by my Social Security benefit, which—if I wait until age 70, as planned—will be some $55,500 a year.

Moreover, if it became necessary, there’s definitely some fat that could be trimmed from our everyday spending. Elaine loves to cook and, by happy coincidence, I love to eat. One consequence: We buy a fair amount of fresh seafood, better cuts of meat and specialty condiments, all of which could potentially be cut back.

But these days, the real fat is to be found in our discretionary spending, which encompasses travel, eating out, concerts, home improvements, and financial gifts to family and charity. This year, such expenses will easily exceed our fixed living costs.

Just one example: We’re slated to travel to England in November for 10 days. The two premium economy plane tickets and the Airbnb in London will cost $5,500, and the final tab will be notably higher, especially after figuring in restaurant meals. That brings me to a rule of thumb I’ve adopted—one that I’m almost embarrassed to reveal: While others may find ways to travel far more cheaply, for us the all-in cost of international trips often approaches $1,000 a day.

When I look at that figure, I get a little twitchy. Partly, it’s what I call old people disease: Thanks to a lifetime of inflation, everything now seems so much more expensive. But partly, it’s because I’ve never spent like this before. I trace the change to October 2020, when I moved to Philadelphia from just north of New York City. What prompted me to open my wallet?

A small part of it might be post-pandemic splurging. But mostly, it’s other factors. I’ve come to realize that there’s little reason to keep saving, that there’s scant risk I’ll exhaust the nest egg I’ve amassed, that the time has come to enjoy the money I’ve saved, that it makes more sense to provide financial help to my kids and to charities now rather than upon my death, that I’m likely to continue earning at least some money through my 60s and perhaps into my 70s, and that we have maybe 15 years to do the sort of traveling we envisage.

A lifetime of frugality has made such spending and giving a whole lot sweeter. It really does feel wonderfully luxurious. And whenever the cash outflow makes me a little uncomfortable, I reassure myself that such expenditures are indeed discretionary and, if necessary, we could eliminate them and our annual spending would plunge.

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

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