Today, we’re nervous about the economy and financial markets. A few years from now, we’ll struggle to remember why.
IT BAFFLES ME that people often favor stock-picking over index funds—and yet they fail to measure their portfolio’s performance against a proper benchmark. I’m not talking about those who buy a few individual stocks for entertainment or education. For them, it’s a worthwhile pastime and the stakes are low.
But there are others who ignore the evidence and arguments against active management, and devote serious money to picking stocks and timing the market in hopes they’ll earn market-beating returns.
MY GREAT-UNCLE, Jerry Kelly, was an American pilot in the Second World War. On Oct. 20, 1944, he was flying a close-support mission over Germany when his P-47 Thunderbolt was hit by anti-aircraft fire. After he radioed that he had smoke in the cockpit, his plane began losing altitude and was last seen disappearing into a cloud. Jerry was 20 years old.
More than 71 years later, a UPS carrier delivered a blue box to my home.
I HAVEN’T BEEN feeling myself lately. Until now, I didn’t understand what had brought this on. You see, I have this different attitude toward money—and it’s changed the way I behave.
Before, it seemed like money was always on my mind. I used to love to read Barron’s every week. Now, I just pick it up in front of my house and toss it in the garage, where it joins 20 other unread copies.
I’M JUST A FEW years from age 65—and being eligible for Medicare. One of my concerns: making a mistake that could trigger penalties.
If you file for Social Security before age 65, you’ll be automatically enrolled in Medicare Part A and B. What if you’re still working at 65? Ask your human resources department for advice. Your coverage at work will dictate whether you should file for Medicare.
If you aren’t covered by an employer’s health insurance plan and you aren’t yet collecting Social Security benefits,
WHEN STEWART MOTT died in 2008, his obituary in The New York Times described him as offbeat. That’s probably a fair description. Mott’s father, Charles Mott, had been one of the founding shareholders of General Motors. As a result, the younger Mott didn’t need to work and instead pursued other passions.
Among his many activities, Mott enjoyed political activism, but he wasn’t a strict partisan. To underscore this, he once brought both a live elephant and two donkeys to a fundraiser.
U.S. STOCKS have been at nosebleed valuations for much of the past three decades—or so say the yardsticks used to measure stock market value. But what if the problem isn’t the lofty price of stocks, but rather the yardsticks we’re comparing them against?
When we try to gauge whether shares are pricey or cheap, we typically look at the dividends that companies pay, the profits they generate and the assets they own. Yet these three crucial numbers have all undergone fundamental changes in recent decades—and the result is that stocks appear more expensive than they should.
1. Compounding. I love the notion of compounding and not because Albert Einstein described it as man’s greatest invention, which he almost certainly didn’t. Instead, I love it because it highlights that time can be as valuable as money—an inspiring notion for cash-strapped young adults who struggle to find $50 or $100 to invest. Time is the lever that can turn those modest sums into significant wealth.
Compounding works best when it isn’t hampered by high investment costs or set back by large losses. That’s why I’m a fan of building a globally diversified portfolio using low-cost index funds.
Compounding, of course, can also work against us. Imagine you racked up $5,000 in credit card debt during your college years. As I noted in a blog earlier this year, if you never paid down the balance and, indeed, the credit card company let you add the 20% annual interest to the account balance, you’d receive a credit card statement after 40 years showing more than $7.3 million owed.
2. Opportunity cost. Whenever we devote our dollars to one use, we’re giving up something else. Yet, in countless impulsive shopping moments, we don’t pause long enough to consider the tradeoff that’s involved and the opportunities that are forgone.
It isn’t simply that the shiny new iPhone can cost as much as a fun five-day road trip. If the choice is between consuming and saving, the $1,000 we spend today might mean giving up $4,000 or more in retirement spending.
3. Future self. Our lives are a constant tug-of-war between the demands of our often-whiny current self and the needs of our future self. All too often, our current self prevails, which is why we end up saving too little for retirement, the kids’ college and other long-term goals.
How can we bolster our future self, so he or she has a fighting chance? We might try a host of tricks: Sign up for automatic investment plans, so money is snatched from our paycheck and our bank account before we get a chance to spend it. Tell family and friends about the commitments we’ve made to improve our financial life, so fear of their disapproval strengthens our resolve. Visualize our future self by, say, writing down in detail what we plan to do with our retirement years, so future spending seems as enticing as today’s pleasures.
4. Human capital. Our income-earning ability is, I believe, the core notion around which we should organize our entire financial life. Those four decades of—we hope—fairly steady paychecks have four key financial implications.
First, they allow us to take on debt early in our adult life to buy homes, cars and college educations, knowing we have many years of income ahead of us to service those debts and get them paid off by retirement. Second, our paychecks provide us with the savings we need to sock away for retirement and other goals. Third, that steady income allows us to take the risk of investing heavily in stocks when we’re younger.
Finally, our human capital drives our insurance needs. If we don’t have significant savings to fall back on, we should protect our income-earning ability with disability insurance. If we have a family that depends on us financially, we likely also need life insurance.
5. Risk pooling. There are some financial risks that we simply can’t afford to shoulder ourselves, including the risk that our house will burn down, we’re sued, or we die prematurely and leave our family in the financial lurch. In these cases and others, the smart approach is to buy just enough insurance to ensure our family will be okay financially.
When we send off our premiums, they go into a pool of money that’s overseen by an insurance company and which is used to pay claimants. We should then cross our fingers and hope to get nothing back, because that’s a sign that life is good.
That said, there’s one form of insurance where we should pray to get paid: longevity insurance. When we contribute to Social Security or purchase income annuities that pay lifetime income, we effectively buy financial protection against the risk that we’ll live a surprisingly long time and outlast our assets. With these forms of insurance—unlike the other insurance policies we own—we should hope to collect vast sums in return for the “premiums” we paid.
6. Ownership. We live in a world where folks increasingly own nothing: Homes, cars, music, furniture, textbooks, movies and clothes can all be rented. And in many instances, this make ample sense.
Still, nobody ever got rich by renting. Instead, the road to wealth involves owning. If we can see staying put for at least five to seven years, we ought to buy a house, not rent. If we plan to keep a car for more than three or four years, we’ll likely find it’s cheaper to buy rather than lease. And if our investment goals are 10 years away, we should become a part owner of corporations by purchasing stocks, rather than renting out our money to sellers of bonds and cash investments.
7. Enough. We all get just one shot at making the journey from here to retirement—and we can’t afford to fail.
What could cause us to come up short? One major risk: Not knowing what counts as enough. If our goal is simply to accumulate more and more, there’s a danger we’ll take reckless risks as we strive for the biggest financial pile possible. A smarter approach: Temper our risk taking—by having a firm idea of what constitutes enough.
TEMPTED TO PUT everybody’s bill on your rewards credit card, so you earn travel points or cash back, and then get repaid by the group? Among U.S. adults who’ve done this, 70% said they weren’t paid back at least once, found a Bankrate survey.
NO. 31: WE SHOULD plan for returns below the historical averages. Today’s rich stock valuations and modest bond yields don’t guarantee low returns—but it’s prudent to assume that’s what we’ll get.
NO. 122: IT’S HARD to make money on a house unless we stay put for at least five years, and preferably seven years or longer. Why? It costs so much to buy and especially sell real estate. Add up title insurance, mortgage-application fees, the commission when selling, local transfer taxes, legal fees and other expenses, and the roundtrip cost could total 10% of a home’s value.
WRITE YOUR own obituary, and list which newspapers and other publications you’d like it sent to. Your family will appreciate having details about your life’s milestones. It will also give you a chance to ponder the achievements you’re most proud of—and it may spur you to consider the work that’s unfinished. What else would you like to accomplish in the years ahead?
DILUTION. As a company sells additional shares or compensates employees with stock, existing shareholders see their stake diluted. Dilution also occurs at the macroeconomic level. As new companies spring up, existing corporations see their claim on the economy’s profits diluted. This dilution has been estimated at two percentage points a year.
IT BAFFLES ME that people often favor stock-picking over index funds—and yet they fail to measure their portfolio’s performance against a proper benchmark. I’m not talking about those who buy a few individual stocks for entertainment or education. For them, it’s a worthwhile pastime and the stakes are low.
But there are others who ignore the evidence and arguments against active management, and devote serious money to picking stocks and timing the market in hopes they’ll earn market-beating returns.
MY GREAT-UNCLE, Jerry Kelly, was an American pilot in the Second World War. On Oct. 20, 1944, he was flying a close-support mission over Germany when his P-47 Thunderbolt was hit by anti-aircraft fire. After he radioed that he had smoke in the cockpit, his plane began losing altitude and was last seen disappearing into a cloud. Jerry was 20 years old.
More than 71 years later, a UPS carrier delivered a blue box to my home.
I HAVEN’T BEEN feeling myself lately. Until now, I didn’t understand what had brought this on. You see, I have this different attitude toward money—and it’s changed the way I behave.
Before, it seemed like money was always on my mind. I used to love to read Barron’s every week. Now, I just pick it up in front of my house and toss it in the garage, where it joins 20 other unread copies.
I’M JUST A FEW years from age 65—and being eligible for Medicare. One of my concerns: making a mistake that could trigger penalties.
If you file for Social Security before age 65, you’ll be automatically enrolled in Medicare Part A and B. What if you’re still working at 65? Ask your human resources department for advice. Your coverage at work will dictate whether you should file for Medicare.
If you aren’t covered by an employer’s health insurance plan and you aren’t yet collecting Social Security benefits,
WHEN STEWART MOTT died in 2008, his obituary in The New York Times described him as offbeat. That’s probably a fair description. Mott’s father, Charles Mott, had been one of the founding shareholders of General Motors. As a result, the younger Mott didn’t need to work and instead pursued other passions.
Among his many activities, Mott enjoyed political activism, but he wasn’t a strict partisan. To underscore this, he once brought both a live elephant and two donkeys to a fundraiser.
U.S. STOCKS have been at nosebleed valuations for much of the past three decades—or so say the yardsticks used to measure stock market value. But what if the problem isn’t the lofty price of stocks, but rather the yardsticks we’re comparing them against?
When we try to gauge whether shares are pricey or cheap, we typically look at the dividends that companies pay, the profits they generate and the assets they own. Yet these three crucial numbers have all undergone fundamental changes in recent decades—and the result is that stocks appear more expensive than they should.
TEMPTED TO PUT everybody’s bill on your rewards credit card, so you earn travel points or cash back, and then get repaid by the group? Among U.S. adults who’ve done this, 70% said they weren’t paid back at least once, found a Bankrate survey.
NO. 31: WE SHOULD plan for returns below the historical averages. Today’s rich stock valuations and modest bond yields don’t guarantee low returns—but it’s prudent to assume that’s what we’ll get.
WRITE YOUR own obituary, and list which newspapers and other publications you’d like it sent to. Your family will appreciate having details about your life’s milestones. It will also give you a chance to ponder the achievements you’re most proud of—and it may spur you to consider the work that’s unfinished. What else would you like to accomplish in the years ahead?
NO. 122: IT’S HARD to make money on a house unless we stay put for at least five years, and preferably seven years or longer. Why? It costs so much to buy and especially sell real estate. Add up title insurance, mortgage-application fees, the commission when selling, local transfer taxes, legal fees and other expenses, and the roundtrip cost could total 10% of a home’s value.
DILUTION. As a company sells additional shares or compensates employees with stock, existing shareholders see their stake diluted. Dilution also occurs at the macroeconomic level. As new companies spring up, existing corporations see their claim on the economy’s profits diluted. This dilution has been estimated at two percentage points a year.
1. Compounding. I love the notion of compounding and not because Albert Einstein described it as man’s greatest invention, which he almost certainly didn’t. Instead, I love it because it highlights that time can be as valuable as money—an inspiring notion for cash-strapped young adults who struggle to find $50 or $100 to invest. Time is the lever that can turn those modest sums into significant wealth.
Compounding works best when it isn’t hampered by high investment costs or set back by large losses. That’s why I’m a fan of building a globally diversified portfolio using low-cost index funds.
Compounding, of course, can also work against us. Imagine you racked up $5,000 in credit card debt during your college years. As I noted in a blog earlier this year, if you never paid down the balance and, indeed, the credit card company let you add the 20% annual interest to the account balance, you’d receive a credit card statement after 40 years showing more than $7.3 million owed.
2. Opportunity cost. Whenever we devote our dollars to one use, we’re giving up something else. Yet, in countless impulsive shopping moments, we don’t pause long enough to consider the tradeoff that’s involved and the opportunities that are forgone.
It isn’t simply that the shiny new iPhone can cost as much as a fun five-day road trip. If the choice is between consuming and saving, the $1,000 we spend today might mean giving up $4,000 or more in retirement spending.
3. Future self. Our lives are a constant tug-of-war between the demands of our often-whiny current self and the needs of our future self. All too often, our current self prevails, which is why we end up saving too little for retirement, the kids’ college and other long-term goals.
How can we bolster our future self, so he or she has a fighting chance? We might try a host of tricks: Sign up for automatic investment plans, so money is snatched from our paycheck and our bank account before we get a chance to spend it. Tell family and friends about the commitments we’ve made to improve our financial life, so fear of their disapproval strengthens our resolve. Visualize our future self by, say, writing down in detail what we plan to do with our retirement years, so future spending seems as enticing as today’s pleasures.
4. Human capital. Our income-earning ability is, I believe, the core notion around which we should organize our entire financial life. Those four decades of—we hope—fairly steady paychecks have four key financial implications.
First, they allow us to take on debt early in our adult life to buy homes, cars and college educations, knowing we have many years of income ahead of us to service those debts and get them paid off by retirement. Second, our paychecks provide us with the savings we need to sock away for retirement and other goals. Third, that steady income allows us to take the risk of investing heavily in stocks when we’re younger.
Finally, our human capital drives our insurance needs. If we don’t have significant savings to fall back on, we should protect our income-earning ability with disability insurance. If we have a family that depends on us financially, we likely also need life insurance.
5. Risk pooling. There are some financial risks that we simply can’t afford to shoulder ourselves, including the risk that our house will burn down, we’re sued, or we die prematurely and leave our family in the financial lurch. In these cases and others, the smart approach is to buy just enough insurance to ensure our family will be okay financially.
When we send off our premiums, they go into a pool of money that’s overseen by an insurance company and which is used to pay claimants. We should then cross our fingers and hope to get nothing back, because that’s a sign that life is good.
That said, there’s one form of insurance where we should pray to get paid: longevity insurance. When we contribute to Social Security or purchase income annuities that pay lifetime income, we effectively buy financial protection against the risk that we’ll live a surprisingly long time and outlast our assets. With these forms of insurance—unlike the other insurance policies we own—we should hope to collect vast sums in return for the “premiums” we paid.
6. Ownership. We live in a world where folks increasingly own nothing: Homes, cars, music, furniture, textbooks, movies and clothes can all be rented. And in many instances, this make ample sense.
Still, nobody ever got rich by renting. Instead, the road to wealth involves owning. If we can see staying put for at least five to seven years, we ought to buy a house, not rent. If we plan to keep a car for more than three or four years, we’ll likely find it’s cheaper to buy rather than lease. And if our investment goals are 10 years away, we should become a part owner of corporations by purchasing stocks, rather than renting out our money to sellers of bonds and cash investments.
7. Enough. We all get just one shot at making the journey from here to retirement—and we can’t afford to fail.
What could cause us to come up short? One major risk: Not knowing what counts as enough. If our goal is simply to accumulate more and more, there’s a danger we’ll take reckless risks as we strive for the biggest financial pile possible. A smarter approach: Temper our risk taking—by having a firm idea of what constitutes enough.