Jonathan Clements's Blog, page 90

Down With Inflation

AMONG THE FINANCIAL topics grabbing investors’ attention, inflation for many years was near the bottom of the list. In fact, between 2010 and 2019, inflation averaged just 1.8% a year, and the Federal Reserve was looking to lift that rate. Throughout 2019, the Fed lowered its benchmark interest rate multiple times, citing inflation that was running below its preferred level of 2%.




But just a few years later, in the midst of the pandemic, all that changed. In summer 2022, inflation hit a peak above 9%, prompting the Fed to reverse course, raising rates in an effort to rein in soaring prices.




Those efforts have been successful, with the most recent Consumer Price Index reading at just 3%. This episode, though, reminds us that inflation can be a serious issue—as it has been on multiple occasions throughout history.




The earliest recorded instance of inflation was during the reign of Alexander the Great. In the fourth century BC, when Alexander’s army conquered Persia, it brought back enormous amounts of gold and silver. The precise amount is difficult to determine, but one calculation estimates that it was the equivalent of trillions in today’s dollars. It was this influx that created inflation at home for Alexander, and it helps us to understand one of the three main causes of inflation.




In technical terms, the situation that plagued Alexander’s Greece is known by economists as “demand-pull inflation.” With its newfound wealth, Alexander’s government began to spend freely. Writing in The Treasures of Alexander the Great, historian Frank Holt describes how money was spent on lavish gifts, public events and construction projects.




Alexander founded 13 new cities, the cost of which Holt refers to as “incalculable.” The result was that everyday citizens had more money to spend, and that led to rising prices. As I mentioned a little while back, the Roman empire fell into the same trap. By reducing the silver content in each of its coins, the emperor was able to effectively “print money.” 




Though it was for a different reason, this wasn’t unlike the stimulus payments that the U.S. government issued in 2020 and 2021. While some of that money helped workers who’d lost their job as a result of COVID-19, this cash was distributed imperfectly. Many folks who weren’t unemployed nonetheless received windfalls, and this led to the same phenomenon—consumers feeling flush and thus able to overspend. It was for this reason that both the stock market and the housing market jumped in 2021.




But stimulus payments were just part of why inflation spiked in 2022. You may recall the near-daily headlines about “supply chain issues.” That was the second factor. Beginning in 2021, as a result of the pandemic, certain components, especially for automobiles, were in short supply. That made cars difficult to get and allowed dealers to charge list prices for the limited number of cars that were available.




Other factors, including Russia’s invasion of Ukraine and its impact on global shipping, contributed to shortages of goods. Because such shortages drive up costs across the economy, economists refer to this type of inflation as “cost push.” 




In other words, as a result of the pandemic, global economies experienced inflation due to factors on both the demand and supply sides. This created a dangerous situation because inflation was on its way to becoming what economists refer to as “built-in,” and that’s the third type of inflation.

When prices are high, workers demand higher wages to keep up with those higher prices. To pay workers more, businesses need to raise their prices, and this can lead to a cycle of wage and price increases. Once a cycle like that gets going, it’s difficult to stop. That fear, I think, explains why the Federal Reserve was so aggressive in raising interest rates and why it's been so hesitant to lower them again.




At the same time, the Federal Reserve does want some amount of inflation. In fact, the Fed has an explicit goal of 2% inflation. Given the problems that inflation can cause—some argue that inflation brought about the fall of the Roman empire—you might wonder why the Fed would want any inflation at all. That, in fact, was the reality for centuries in Europe, where prices generally didn’t change at all from year to year. When inflation did enter the picture, very modestly, in the 1500s, it caused significant social upheaval.




So why, despite the risks, does the Fed want to see some modest inflation each year? There are a number of reasons, but economists generally focus on one: If inflation falls too close to zero, there’s a risk it could actually slip below zero and become deflation, with prices falling from one year to the next.




The reason deflation can be a problem is subtle: If consumers expect prices to be lower in the future, they might choose to delay purchases, with the hope of paying a lower price next week or next month. This causes businesses to lower prices in an effort to entice consumers, thereby compounding the problem. 




Over time, deflation can lead to economic stagnation as consumers delay purchases for as long as possible. By contrast, when prices rise modestly over time, there’s no incentive to wait, and that helps to keep the economy chugging along. This risk isn’t just theoretical. For most of the past 25 years, Japan has struggled with deflation, and this has led to what observers call Japan’s “lost decades.” Prices have only recently turned positive, but it’s been a terrible period, and this is what the Fed wants to avoid.




What lessons can we draw from all this? First, it’s a reminder that we should never be too sure about what the future holds. When the Fed was struggling with inflation that was too low in mid-2019, no one would have guessed that just three years later policymakers would be contending with the opposite problem. Since no one—not even the Fed—can see the future, the most important thing, in my view, is for investors to remain diversified.




Starting on the bond side of a portfolio, there are Treasury Inflation-Protected Securities (TIPS). These are government bonds that are guaranteed to increase in value at whatever the inflation rate is. TIPS have a close cousin known as Series I savings bonds. These function mostly the same way, but at any given time, one or the other will tend to offer investors a better yield. Today, I see TIPS as the better bet.




What else might you hold to guard against inflation? In 2022, when inflation was rising, stocks dropped. That might lead us to believe that stocks do poorly when inflation is high, but that’s not entirely true. While every company is different, some have more of an ability to raise prices than others. Those that have this flexibility are able to navigate inflation quite well.




Looking back at 2022, when inflation was at its worst, companies on average were indeed able to raise prices. This could be seen in their gross margins, which measure the difference between their costs of manufacturing products and the prices at which companies are able to sell them. When I looked at the data in late-2022, gross margins had increased during that inflationary year even more than they had, on average, in the last pre-COVID 19 year. This helped to support those companies’ profits. And because profits ultimately drive share prices, this is a reason I see stocks as a reasonable hedge against inflation.

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

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No Slowing Down

WHO HAS TIME TO die? I never realized death would be so busy.

I thought I had my financial affairs in good order. But in the two months since my cancer diagnosis, I’ve made countless financial tweaks, mostly with a view to making things easier after my death for my wife Elaine and my two children.

Here are just some of the steps I’ve taken:

I took my two checking accounts—my personal account and the business account for HumbleDollar—and made Elaine the joint account holder with rights of survivorship. One reason for the switch: My personal account is automatically debited for all utilities and other household bills, and the change in titling should make it easier for Elaine to keep tabs on things after my death.
I’ve cancelled two of my four credit cards, and plan to cancel one more once I’ve used the rewards I’ve accumulated. That’ll leave just one card. Elaine has two cards of her own, so we’ll have a backup if a card gets hacked, lost or stolen during the trips we have planned for the months ahead.
I closed a small IRA I inherited from my father in 2009. It had just $6,700 in it, but I’d hung on to it, partly for sentimental reasons and partly to avoid the income-tax bill triggered by liquidating the account. But after my diagnosis, I figured shutting down the account would be one less thing for my family to deal with.
I rolled over the solo 401(k) I had at Vanguard Group—which was all Roth dollars—into my Roth IRA. That, too, means one less thing to deal with after my death. Even before my diagnosis, I was irked that Vanguard was turning over administration of its solo 401(k) operation to another company, another tell-tale sign of the firm’s weak commitment to less important lines of business. But with my diagnosis, I also realized I was less interested in saving for the future and more focused on giving, and that’s where my extra dollars will go from now on, rather than into my solo 401(k).
I’m in the middle of getting a new will, along with medical and financial powers of attorney. Yes, I’m finally getting those powers of attorney—a missing piece of my financial life that I’d acknowledged last year and which triggered some well-deserved tut-tutting from commenters.
I tweaked my IRA’s beneficiary designations. My two children will split my Roth IRA, which seems like the tax-smart way to go, because emptying that account over 10 years won’t mean extra taxable income on top of their current salaries. Meanwhile, Elaine and my kids will share my traditional IRA, with its embedded income-tax bill.
I added Elaine as the beneficiary of my modest health savings account and the variable annuity I bought through Vanguard more than two decades ago. I purchased the latter when I was maxing out on my other retirement accounts and looking for further tax-deferred growth. Like its solo 401(k) operation, Vanguard’s variable annuity business was unceremoniously turned over to another financial firm, in this case Transamerica.
I have a few banker’s boxes of financial papers stashed in the basement, which I’m now in the midst of pruning. Among other things, those boxes include every tax return since 1986, when I moved to the New York area from London. Yes, there’s some serious shredding to be done.
I forgave the private mortgage I wrote for my daughter in 2015. That'll necessitate me filing a gift-tax return for 2024, thereby reducing my $13.61 million federal estate-tax exemption. But given that my estate won't be worth anywhere close to $13.61 million, there's no financial downside.
I’ve also made financial gifts to my new grandson and son. But if I don’t live for 12 months after making these various gifts, all concerned—my so-called lineal descendants—will face Pennsylvania’s 4.5% inheritance tax on all but $3,000 of the gifts. That isn’t an issue with Elaine, who as my spouse isn’t subject to the inheritance tax. Even before my diagnosis, we’d planned to get married. We moved up the date when I got the bad news.

There’s still more to come: I need to move various insurance policies—such as homeowner’s, flood and umbrella liability—into Elaine’s name. Ditto for various utility bills. I also need to make Elaine the person responsible for purchasing the various technology services that keep HumbleDollar humming along. And as I mentioned a few weeks ago, we’re still trying to figure out the best Social Security claiming strategy for Elaine, knowing she may be able to receive my benefit as a survivor benefit.

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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Fantasy Island

I'M NOT PARTICULARLY well traveled. I’ll turn age 65 at the end of this year and I’ve never been to a Caribbean island. I’ve never been to Hawaii or Bermuda. Heck, I’ve never even been on a cruise.




I’ve never been to Canada or Alaska. I’ve been to a couple of the U.S. National Parks, but have yet to visit the Grand Canyon, Yellowstone and Yosemite. 




I’ve been to Europe quite a few times, mainly to London, but most of those were business trips and I didn’t have much time to wander and explore. On my European bucket list: Scotland, Ireland, Italy, Spain and Portugal. 




I went to Tokyo once on business but otherwise haven’t seen Asia. I’ve never been to Australia, New Zealand or Africa. Likewise, I’ve never been to South America, although I did get to Cancun five years ago on an all-inclusive vacation and can’t wait to go back. 




I’ve always longed to travel, especially to those glorious Caribbean islands with the sparkling turquoise water that I see on people’s Instagram feeds. But let’s face it: Travel is expensive and, as a single father with three sons, I’ve had other financial priorities, like saving in my kids’ 529 college plans and putting away money for my own retirement. 




The bulk of my personal travel up to this point has been camping and hiking trips with my sons. I’m a big nature lover and camping, I’ve found, is a cost-effective way to introduce kids to the great outdoors. The plan—one I’ve had in my head for as long as I can remember—has always been that the exotic travel adventures would come later when the kids were out of college and I had enough stashed away to splurge a little.




And thus it went through some 30 years of working and saving. At last, when my youngest son graduated from college five years ago, I thought that now, surely, I’d be able to travel.  




Then, unexpectedly, my father’s health went downhill, and my siblings and I needed to take care of him for six grueling months before he passed away. Soon after, COVID hit and global travel came to a halt. 




Be patient, I thought. Just a little longer. I had visions of lying on a beach in the Turks and Caicos, sipping on strawberry margaritas while looking out at those gorgeous blue-green waters. 




As the pandemic lockdown began to loosen up, my fiancée and I started to make plans for a Caribbean vacation. Then my mother had a stroke and needed to be moved into a senior living community. The Caribbean is a long way to go when your mother’s health is in question, so we nixed the trip. 




Two years on, Mom thankfully is still with us, but she’s growing frailer and needs constant care and attention. How can I go away on a weeklong vacation in the Caribbean and leave my siblings to take care of her? I can’t. Conscience doth make cowards of us all.

And so Rachael and I are focused on taking short trips. This month, we’re heading to Key West for an extended weekend stay. Even with that, I’m sticking with refundable fares and hotel stays because, well, you never know what might happen.




I haven’t given up on my fantasies of spending serious beach time in the Caribbean. I still hope to get back to Europe and maybe take a river cruise down the Danube. I’d love to go to New Zealand one day and see the country where my favorite trilogy, The Lord of the Rings, was made.




But as I approach my 65th birthday, I’ve accepted that I’ll likely never get to even half the places on my bucket list. My health, knock on wood, is still good, but that won’t last forever. My window for traveling is closing quickly, and I’ll need to tightly prioritize which places I really want to see and which aren’t so important.




I say all of this not to depress anyone, but only to inject a dose of realism into those retirement fantasies. The responsibilities and obligations don’t magically disappear when the kids get older; they only change form. There may never come a time when your horizon suddenly clears for travel and, even if it does, there’s no guarantee it’ll stay clear for long.




My advice: If you really want to travel, don’t delay. Make a priority of doing it when you’re young and healthy, before the children come along and before the parents run into health issues. If you already have kids, take them with you to the places on your bucket list. Heck, take the parents with you, too.




Spend the money, even if it means, for a time, that you’re not putting it away in investments. You’ll always be able to make more money. What you won’t be able to do is buy the time you need to do the things you burn to do. 




Life is for living. Squeeze the orange for all it’s worth, ideally on a white-sand beach with a view of the Caribbean.

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

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On Being 80

WHEN I REACHED AGE 70, I felt a sense of accomplishment, a bit of weird pride. At 75, I had a similar feeling. But when I turned 80 last year, things felt different. It was like I was an overachiever. Suddenly, the future wasn’t as long.

For many years, I’d searched for a high school friend who’d been my navigator at sports car rallies, but with no luck. Then, recently, I stumbled across his obituary. He died 20 years ago, at age 60.

Three of my four Army buddies are gone, as is my lifelong friend from age four, who succumbed to the effects of Agent Orange after three tours in Vietnam. I appreciate being 80.

Some people act their age. I try not to. Nobody I ask thinks I’m 80—at least that’s what they claim. I’m not sure how they expect an 80-year-old to act. I don’t like being perceived as old. More than once, while on a call with a customer service representative, I’ve been told I don’t sound my age.

While in Florida this winter, I tripped getting out of a car. My iPhone went flying and I landed flat on my face. I cracked a couple of ribs and smashed a knee. A young man rushed up to see if I needed help getting up. I didn’t. I thanked him, but I was embarrassed. Was this the beginning of the end?

Looking around, there are many 80-somethings who look and act 80-something. I can’t help the way I look, but I sure try to not act my age. I don’t drive in the left lane at 40 mph and I remember to turn off the directional signal—and the oven as well.

We all age differently, so I’m not mocking my peers who struggle. Still, it seems some behavior at 80 is an extension of lifelong attitudes and habits. Too many people go through life oblivious to important things around them. They fail to plan and consequently suffer. Inflation matters to retirement finances. Having sufficient money is vital or debt can overwhelm you. This can lead to financial struggles and playing catch-up in old age.

I asked an artificial intelligence program how to know if I’m old. I checked all the boxes. Yes, I’m 80, I have gray hair of minimal quantity, I have some wrinkles and I need more sleep.

The other factor it listed was activities. Eighty-somethings prefer staying in over going out late, and prioritize comfort over fashion. Heck, that described me at age 30.

My theory is you know you're old when your children start giving you advice, rather than asking for it. What? Does my experience count for less as I age? I take comfort in knowing lots of stuff, even if that stuff happened 60 years ago.

There are limits, though. Once a three-year-old grandson asked me if I ever had a pet dinosaur. No, but I do have the latest iPhone.

Eighty is a pretty good number if you play golf. I haven’t made that score yet, but my age and my score are getting closer, and not because I’m a better golfer.

Stairs are not a problem for me yet, but a major one for my wife Connie. My pace on the stairs and walks needs to match hers. My appetite has declined. I just fill up faster and the doggy bag is now a way of life.

I find the simple things more appealing, like getting up each morning, making a cup of coffee, and checking on both HumbleDollar and my own blog. I also look forward to days when there’s nothing planned and nothing in particular to think or worry about. In reality, those days are a bit rare.

Nowhere in my research did I find that aging affects the curmudgeon factor. That said, Connie is more frequent with her “you’re acting like an old man” comments.

I was in a coffee shop recently and began talking to a toddler who smiled at me. After a minute, the mother gently pulled the child toward her, as if protecting him from a dirty old man. That hurt. I like being around children.

I also get along well with dogs. They like to have their back rubbed. Me, too.

We have long-term-care insurance but with limited coverage. Our chances of using it may increase with age. On the other hand, the duration of its possible use declines. There’s also a declining likelihood of our running out of money. Connie and I have lived in nine decades, and we’re hoping to hit 10.

Getting older creates new challenges. My Connie, age 85, is once again facing a serious health issue. Dealing with it is our challenge now, but we intend to press on with life and get even older. And we’re still grateful.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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Not My Thing

IN RICH DAD POOR DAD, author Robert Kiyosaki touts the virtues of owning real estate as a way to reach financial independence. He explains the difference between how his father handled money and invested in his education, versus his friend's dad, who gained his wealth by investing in businesses.

There’s controversy over whether this is a true tale or just a literary device to explain how to invest in real estate. Either way, there’s a lot to learn from Kiyosaki’s book. One thing I learned: Real estate investing isn’t for everybody. That would include me.

I’ve been aware of real estate’s appeal since Robert Allen’s 1984 book Nothing Down. I would see his late-night infomercials and think, “That’s what I need to do to reach my dream of personal wealth.” I attended free seminars on real estate investing. It all made sense, except for one thing: It didn’t excite me.

At the time, I was renting a studio apartment in Brooklyn. I kept hearing about how all these people were making a killing in real estate. I wanted to be rich. But why would I buy a rental property when I was paying rent myself? Why wouldn’t I buy my own place first?

I’ve owned two pieces of real estate in my life, a condo and my current single-family home. Kiyosaki talks about the joy he feels owning real estate. But I didn’t feel joy buying either home. I decided real estate investing wasn’t for me.

That decision was confirmed by watching reality TV shows about real estate investing. One show stands out in my mind. It was based in South Carolina. The main character was a visionary with money. He could look at a house and see what needed to be done to make the house attractive to potential buyers.

He had a general contractor on his payroll who could tell him how much it would cost to make the necessary changes. Assuming the cost was reasonable, the visionary would buy the property using his real estate broker, who was also on his payroll.

The general contractor would hire quality sub-contractors to do the work. They’d improve whatever needed correcting and fix the house up to be more attractive. This included flooring, roofing, appliances, and painting or vinyl siding. The general contractor would oversee the work and guarantee it was done right. There would be a before and after view. It always impressed me. The visionary’s real estate broker would advertise the house and, of course, it would sell at a handsome profit.

My takeaway from watching the show: I had none of the resources this visionary had. I can’t look at a house and see what needs to be done. I don’t know any general contractors who I can call upon to review a potential buy and tell me the total projected fix-up cost. I don’t have a real estate broker at my disposal who could sell this newly formed real-estate masterpiece. In short, I have neither the resources nor the desire to run a successful house-flipping business.

I’m not saying real estate isn’t a good investment. It is for the right person. But just because someone has made a killing in real estate doesn’t mean we all can. Slick salesmen are skilled at convincing us all that, if we only buy what they’re selling, all our troubles will be over. If it were only that simple. Success is a personal pursuit. It’s not a one-size-fits-all type of activity.

Doing something that’s “not you” probably won’t end well. Instead, stick to your strengths and the things that interest you. That’s more likely to lead you to personal satisfaction and wealth.

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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One Is Not Enough

SUPPOSE YOU WANTED to construct as simple an investment portfolio as possible. What would it look like?

Many argue that, for stock market exposure, you could go with a single fund, one that tracks the S&P 500 index. The S&P index offers broad diversification and tax efficiency, plus it includes the largest and most successful companies, making it a popular choice. But it’s not perfect.

The S&P 500, like many market indexes, holds stocks in proportion to their size, meaning that the most valuable companies carry the largest weightings. There’s a logic to this, because it mirrors the overall market, but sometimes it can lead to distortions. That’s the case today. A handful of the largest companies—mostly in technology—are orders of magnitude larger than nearly every other company in the index.

The top five—Microsoft, Nvidia, Apple, Amazon and Google parent Alphabet—each carry valuations north of $2 trillion. By contrast, the average market value of the other 495 stocks is just $71 billion. As a result, because they’re weighted by value, those top five companies account for almost 29% of the overall index—an enormously disproportionate share.

Why is this a problem? In recent years, it hasn’t been. In fact, it’s been a great benefit. These stocks have vastly outperformed their peers, and because of their disproportionate weighting, they’ve helped drive the overall index up. But at the same time, it also means that the S&P now carries more risk. If any one of those top five ran into a problem, it could materially affect the overall index. Just as their sizable weightings helped to drive the market up, the reverse could be true.

Some, in fact, think the effect could be magnified if one or more of the largest companies in the index were to run into trouble. One well-known market observer is Michael Burry. Because he was the central character in Michael Lewis’s The Big Short, he’s seen as a reliable voice in the industry.

It rattled some investors when he painted this picture of index funds: “The theater keeps getting more crowded,” he said, “but the exit door is the same as it always was.” That was in 2019, and the market has only become more top-heavy since then. Back then, the top 10 stocks accounted for just 19% of the total. Now, the top five are 29%.

A second concern: Not only has the index become more top-heavy, but also it’s less diversified. According to recent research by Derek Horstmeyer, a professor at George Mason University, today just two industries—technology and financial services—account for 42% of the overall index. This represents a risk because stocks in the same industry tend to be more highly correlated with each other than with stocks in other industries. Among the top 10 stocks in the S&P today, eight are in technology.

A third concern is valuation. Since 1985, the price-to-earnings (P/E) ratio of the S&P 500 has averaged 15.7. But today, it stands considerably higher, at 21.6. By contrast, the S&P 500’s closest international peer, the EAFE index of developed markets, is no more expensive today than it was 20 years ago. And while P/E ratios aren’t guaranteed predictors of future performance, they are indicative of risk.

Fortunately, there are easy ways to address these concerns. You could hold the S&P 500, but then add to it to build a more balanced portfolio. You could include funds with exposure to international stocks, to mid- and small-cap stocks and to value stocks, all of which are trading at more reasonable valuations. While these other stocks are all included in total stock market and total world stock market indexes, the benefit of owning them separately is that it would allow you to control the weightings, so they wouldn’t be overshadowed by the top-five behemoths.

Another way to achieve more balance would be to opt for a version of the S&P 500 that weights each component equally, rather than weighting them by size. In the Invesco S&P 500 Equal Weight ETF (symbol: RSP), Microsoft carries a weighting of just 0.19%. That’s in contrast to the standard S&P 500, where Microsoft’s weighting is 7.2%.

Those are the mathematical answers. But in thinking about this decision, it’s worth taking a step back. There are bigger-picture ideas to consider. For starters, it’s important to view these performance differences in perspective. Over the past 20 years, the S&P 500 has returned a cumulative 550%. That has far outpaced value stocks, up 394%, small- and mid-cap stocks with their 370% gain, and developed international markets, which have returned just 130%.

Those are significant differences—but the returns of bonds pale in comparison to the returns of all stock markets. Over the past 20 years, total bond market funds have returned just 30%. This leads to an important conclusion: When constructing a portfolio, the most important decision hinges on the split between stocks and bonds. That decision is far more consequential than the choices we make among different stocks.

It’s important also to recognize another reality about investments: We only know what the past has looked like. And while that might serve as a guide, ultimately there are no guarantees. The future may—and probably will—develop in ways that are hard to foresee. That’s why I’m an advocate of what I call a “center lane” approach: In constructing a portfolio, try to build in enough diversification that you’ll benefit no matter which corners of the market end up leading the way.

In diversifying beyond just one fund, there are other benefits, too. While we can’t know in advance how each segment of the market will perform, we can be sure that they’ll perform differently. That can provide flexibility when it comes time to rebalance a portfolio or to take withdrawals. Suppose a retiree held two funds in his portfolio, one of which had a gain and one was at a loss. To take a withdrawal, this retiree could sell a bit from each fund, thus moderating the tax impact.

A final point: With the S&P 500 having delivered such impressive gains over the past 15 years, you might worry about buying at all-time highs. That’s an understandable concern. The reality, though, is that the market is often at all-time highs. Since historically the market has risen in about three-quarters of annual periods, it makes sense that it would frequently be at new highs. In fact, the data show, counterintuitively, that market returns are higher for purchases made on days when the market is at all-time highs.

Of course, this data—like all data—are backward-looking, and that brings us back to the first point above. Since we can’t know which way the market will go in any given year, the most important thing is to have an adequately conservative split between stocks and bonds. While there are no guarantees in personal finance, this simple formula is, I believe, the best way to increase our wealth while also sleeping at night.

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

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Protecting My Sanity

I BEGAN INVESTING in the stock market in 2007. Within a year, I’d lost 60%. My response was like that of almost any human: I stopped investing.

That’s what happens to most people who start investing at the height of a bubble. They invest in something when everybody else does. And when everything comes crashing down, the pain of loss is so bad they swear they’ll never invest again. 

While I missed out on huge returns in the years that followed the financial crisis, I spent my time figuring out how successful investors stayed in the game. I learned that the key to wealth building is managing emotions. In my experience, investing is 9% theory, 1% execution and 90% managing our emotions. 

That’s why I’ve been applying the philosophy of Stoicism to my investing strategy. Stoicism is an ancient Greek philosophy that started in the third century BC. The foundation of Stoicism is based on the notion that we should know what’s within our control and what isn’t. At its core, Stoicism is a way of protecting our sanity by managing our emotions.

This is particularly important when the market goes down. So many investors abandon their strategy at the first sign of market turmoil. As we all know, that’s a recipe for losing money. If we can find a way to become consistent investors throughout our lifetime, through the market’s ups and especially the downs, it’s all but inevitable that we’ll build wealth.

Surviving downturns. Whether we’re a seasoned trader or a retail investor who’s just starting out, investing comes with pain. Every time we make a trade, we run the risk of losing money and missing out on other opportunities. 

If we’re afraid of those things, we make life hard for ourselves—especially when there’s a market downturn. During those times, there’s nothing we can do to change the overall market. Sure, we could pull out of the market. Otherwise, we just have to find a way to invest our way through it.

Some investors blame their own judgment or skills when they lose money. They try to find answers in the market. They think they need to spend more time studying and analyzing. But what they really need to do is accept that there’s no one to blame.

The Stoic philosopher, Epictetus, talked about how we often blame others for the way we feel. And if we don’t blame others, we blame ourselves. But both of those approaches are wrong. Epictetus said, “When you blame others for your negative feelings, you are being ignorant. When you blame yourself for your negative feelings, you are making progress. You are being wise when you stop blaming yourself or others.”

Similarly, when we blame the market or ourselves for our results, we’re wasting our energy. If we’re invested in risky assets and we’ve made the right decisions, we shouldn’t worry about the things that are outside of our control—like a market downturn. 

Throughout the year, there are always rough periods in the market. Whether the market is reacting to rising bond yields, changing inflation forecasts, interest rates or anything else, we must remind ourselves that market downturns are temporary. 

Losing sleep. Stoicism has its limits. If we’re invested in risky assets that plunge 20% in a single day, I don’t think even the world’s most stoic person would remain calm. 

That’s why I avoid putting my money in risky assets that cause me to lose sleep. When I invest in the S&P 500 index, I don’t worry whether the 500 greatest companies in the world will still be around when I wake up. I’m 100% confident the world will keep moving forward and that many companies will do the same. 

But if I hold a big position in a volatile stock, cryptocurrencies or a meme stock, I don’t feel comfortable. But to me, that’s not investing, it’s speculation. If we do that with money we can afford to lose, it’s fine. But if we’re counting on that money to build wealth over time, we’re taking a big risk. 

Staying the course. Let’s say we go with a dollar-cost averaging strategy, investing $500 in an S&P 500 index fund every month. Don’t stop if market sentiment turns bad.

While Epictetus wasn’t talking about investing when he said the following, it’s still applicable to today’s stock market: “Once you undertake to do something, stick with it and treat it as something that should be carried through. Don’t pay attention to what people say. It should not influence you in any way.”

This, of course, is easier said than done. But as long as we understand that we aren’t taking undue risk, we have nothing to worry about. 

If we want to build wealth over time, we need to keep investing so we can benefit from the power of compounding. We can’t allow our emotions about short-term fluctuations to get in our way. 

The biggest threat to an investor is to stop investing. I did that after the 2008-09 crash, and subsequently missed out on one of the biggest bull markets in recent history. Back then, I didn’t know about the principles of Stoicism, so I allowed my emotions to get the best of me. 

When the COVID market crash of 2020 happened, I felt an itch, but I remained in the market. I even bought some individual stocks that were on sale, so I ended up putting more money in the market. I learned from Epictetus to stay the course. 

As a Stoic investor, we always need to stick with our plan and carry on no matter what. As long as the world keeps progressing, our investments will, too.

Darius Foroux is the author of eight books, including The Stoic Path to Wealth, which was published this month. He writes about productivity, Stoicism and wealth building. Darius publishes a weekly newsletter called Wise & Wealthy .

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Signs of the Times

GETTING OLD CAN, after a while, get really old. Here are 30 ways I’m reminded that I’m no longer a spring chicken.

Life insurance salespeople burst into laughter when I inquire about a policy.
My house is so warm I can cook without using the oven.
As I walk past the neighborhood funeral parlor, the undertaker’s eyes light up.
Decades ago, all my doctors were stern, serious men. Now, my primary care physician is a woman with a great sense of humor—who was born after I retired.
When I was young, conversations were about girls, beer, baseball and cars. Now, it’s Social Security, Medicare, long-term care and which of our friends died recently. 
When I call 911, the dispatchers recognize my voice.
I can’t remember the last time I got carded for the senior citizens’ discount.
When I fire up my hearing aids, the entire East Coast blacks out.
My 2004 Toyota Corolla has just 2,300 miles on it, but I’ve replaced the turn signal bulbs a dozen times.
I’m on a first name basis with every employee, from the parking lot attendants to the doctors, at Boston’s major hospitals. 
I have the early bird specials memorized for dozens of restaurants.
When I arise at 4 a.m., I feel guilty for oversleeping.
I know how to dial a rotary phone, read a roadmap and write a check. 
When I sink my teeth into a nice steak, they stay there.
My idea of an exciting evening is to put on mismatched socks, wear my cap at a jaunty angle and yell "bingo" when I don't have it.
None of my relatives has any idea which side of the family I belong to. 
I get tired taking a nap.
As I try to join a conversation, everyone looks at me and nods sympathetically.
After my physical, I ask my doctor, "Well, how do I stand?" She replies, "That's what I'm wondering."
All of the bathrooms are equipped with grab bars.
When I tell a joke, the crowd laughs well before the punchline.
I’ve had so many X-rays, MRIs and PET scans that I’m officially radioactive.
As I back the car down the driveway, the neighbors make the sign of the cross, and hustle their children and pets indoors.
I no longer laugh at the commercial where the woman yells, "I’ve fallen and I can’t get up."
When I try to jog, I get ticketed for loitering. 
On my tax return, I have three doctors and five nurses listed as dependents. 
I like my steak cooked just one way: burnt. 
My CPAP machine draws enough air to change weather patterns.     
When I bend over backwards to help someone, I can’t straighten up again.
I made a trip to Mount Ararat, and Methuselah called me "sir."

Michael Berard, his wife, dog and two cats live in Swansea, Massachusetts. He retired after a career as a machine tool worker.

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Driven by Taxes

EXPERTS OFTEN ARGUE that tax-avoidance strategies shouldn’t drive our financial plans, especially as Congress is forever fiddling with the tax rules. And yet many of us end up making decisions based on federal tax policy, which is loaded with incentives designed to change behavior and advance social goals.

That’s certainly true for my wife and me. Despite the tax code’s many provisions—and its 75,000 pages of complexity—four big-picture tax considerations have largely shaped how our financial lives have turned out, and perhaps that’s true for you, too.

Homeownership. Tax policy has long encouraged homeownership through the deductions for mortgage interest and property taxes. Before the standard deduction doubled in 2018, some 30% of taxpayers claimed these two deductions.

Homeownership was such a strong pull for my wife and me that we bought our first house in 1979, when we were both age 23, just 10 months after we married. We finagled our finances so we could amass (just barely) the house down payment and meet the monthly mortgage payment.

Subsequently, we bought homes in 1991 and 2022, both of which we still own. Each was a colossal stretch, leaving us cash-strapped for a time. In past decades, buying “the most house you can afford” was common advice to capture both big-dollar tax deductions and the potentially outsized gains from leveraged home-price appreciation.

The 2017 tax law trimmed the use of home-related tax deductions. Today, just 11% of taxpayers take the mortgage interest and property tax deductions. That’s why most financial pundits now recommend against stretching to buy housing. This could change, though, should the 2017 tax law be allowed to sunset as scheduled in 2026 and the standard deduction revert to its earlier, lower levels.

While we now forgo the twin housing tax deductions, we have no plans to change our overweighted real estate holdings, particularly since the latest house purchase is near our children—life’s best tax deduction.

Contributions to 401(k)s. Income saved in our 401(k) plans—along with the subsequent growth of those dollars—are tax-deferred until withdrawn. This led us to accumulate nearly 90% of our financial assets inside tax-deferred accounts by the time we retired. Our lopsided allocation arose because we contributed the maximum to our 401(k) plans each year, while maintaining a 100% stock allocation and never trading in these accounts.

Our retirement savings blossomed, but our finances lacked tax diversification. All this money will be taxed as ordinary income upon withdrawal, not at the lower capital-gains tax rate. The upshot: We have a large pending tax obligation that’ll be paid as we tap these accounts. We’re also handcuffed to the ever-changing rules on required minimum distributions and withdrawals from inherited IRAs.

Unfortunately, our required minimum distributions will be taxed at higher rates than we would have paid when we deferred taxes on contributions during our early working years. We naïvely followed the conventional wisdom that “your tax bracket will be lower in retirement.” We and our advisors never contemplated the potential for tax bracket creep in retirement, the result of decades of inflation and investment appreciation.

Young workers in their lowest tax-rate years are now advised to favor Roth contributions over traditional tax-deductible retirement accounts. Roth and health savings accounts can slow tax-bracket creep for those likely to have higher retirement incomes as a result of career growth, stock appreciation, business income or an inheritance.

Retirees also shouldn’t lose sight of the possibility that their nest egg might double in value should they delay withdrawals for the 10 or 15 years between retirement and the onset of required minimum distributions, currently set at age 73. This could push them into a higher bracket just as the time comes for mandatory taxable distributions.

Step-up in basis. The chance to get embedded capital gains forgiven upon our demise has resulted in our death-grip hold on 19 individual stocks, which we purchased decades ago within our taxable accounts. These highly appreciated stocks are our only remaining after-tax holdings. Each has an unrealized capital gain of between 300% and 10,000%, and together constitute about 12% of our financial assets.

Over the years, we sold all losing stocks to offset realized taxable gains. We also sold any stocks and funds having modest gains to raise cash for, among other things, our 2022 house purchase.

The step-up in cost basis is also one of the main reasons we’ve retained our 1991 house. It’s a complicated situation, but this house has now become an unanticipated furnished rental property. We helped a military family displaced by a fire with a brief emergency rental, which extended into an 11-month stay.

Roth conversions. The lower income tax rates created by the 2017 Tax Cut and Jobs Act prompted us to undertake significant Roth conversions in recent years. Our conversions have been taxed at a 24% federal rate, rather than the 28% or 33% hit that would have been triggered before the 2017 law.

After we cover normal living expenses and help our children a bit, paying the taxes on Roth conversions, plus the resulting higher Medicare premiums, has soaked up every spare penny of after-tax income. Thus far, we’ve converted around 14% of our portfolio to Roth accounts.

Our tax-deferred balances now comprise a less-lopsided 74% of assets, not 90% as before. We plan to continue Roth conversions until the Tax Cut and Jobs Act sunsets in 2026, and possibly until our required minimum distributions start in 2028.

As I look back on the four big tax influencers, tax incentives drove us to overspend on housing and over-save in tax-deferred accounts. Both are considered desirable outcomes from a federal policy viewpoint.

So, too, are our Roth conversions, which have helped fatten the Treasury Department’s tax collections. The anticipation of a step-up in cost basis in our estate has led us to be “forever owners” of stock winners in our taxable account. Yes, despite what the experts advise, we are behavioral slaves to the tax code.

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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Wouldn’t It Be Nice

MY FAVORITE ROCK group is the Beach Boys. I particularly like their song Wouldn’t It Be Nice. It’s about young love, and how life would be so wonderful if only they were married and lived together.

I believe that phrase “wouldn’t it be nice” has been voiced by most of us at one time or another. The notion: If things were different, all would be good.

Unfortunately, few people display the persistence needed to turn their dreams into reality. How do you go from wishing to achieving? The method I’ve used is to break down a goal into the smaller steps needed to get me to what I wanted.

If I needed a job, I could wish for a fairy godmother to grant me my wish, or I could hope friends would do the heavy-lifting by identifying that ideal employer. These would fall into the “wouldn’t it be nice” category. But I assumed such things wouldn’t happen.

That’s why I did things like sign up for LinkedIn to build my professional network. I was supposed to invite only people I knew or friends of people I knew. But I didn’t think that would result in a large enough network. I simply requested to connect with anybody who was currently in the insurance industry in the New York metropolitan area. The result? Before LinkedIn told me to stop asking strangers to connect, I’d greatly enlarged my network.

Although this tactic didn’t land me a job, the one I did get was from someone who’d known me for years and saw my LinkedIn profile. The important takeaway from my LinkedIn efforts: It allowed me to do something productive, so I felt I was getting closer to my next job. Each LinkedIn invitation I sent out was a small step that helped get me closer to my goal.

Indeed, doing is the key element here. Regardless of the ultimate goal you’re seeking, taking action will make you less anxious and keep you focused.

How do salespeople meet their sales target? They try to sell to lots of people. Each sales call is a step toward their goal, and improves their odds of success. This same approach works with other goals. Even if the things you do each day don’t get you directly to your goal, you’ll probably gather useful new information.

This step-by-step approach also works if your goal is to be rich. Your first step is to get income. In most cases, that means getting a job. The next step is to acquire the habit of paying yourself first. Before your money goes to any bills, entertainment or other spending, be sure you sock away some money. Your next step might be to increase your income without increasing your expenses, so you can save even more.

As you complete each step, you should acknowledge that the step has been achieved. That will give you strength to achieve the next step. Inch by inch everything's a cinch. Yard by yard everything gets really hard. Go for the inches to achieve your yards.

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