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Winning the Debt Game by David Powell

"Towards the end of the book of The Best of Jonathan Clements that Jonathan selected to include in this compilation book is my favorite article dated 2/27/15 where Jonathan quotes George Kinder the author of The Seven Stages of Money Maturity and adds his own commentary. The article is titled Three Questions that can Change Your Finances... and Your Life. I will not spoil for you, with my poor attempt to summarize the article, the article which I consider the best of The Best. I hope you choose to read this book and this article. I concur with David's recommendation of this book being the best personal finance book of 2025."
- William Perry
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Buying an Annuity from the SSA

"I thought my last paragraph covered your comments. I apologize if it wasn't clear. I acknowledged that people in "desperate financial situations" may need to take their benefits as soon as possible, I've spoken to dozens of them over the last 7 years of TaxAide. I also wrote that those who don't need their SS benefits can do whatever they choose. It makes little difference. Like you I have a pension and am glad of it. I have never pushed back on the idea of using annuities to secure guaranteed retirement income. But focusing on the two extremes ignores a large swath of retirees who have both SS and some level of retirement savings. They have to make decisions on how to best generate income. They could likely benefit from an annuity to help secure a safe level of income. The real point of the CRR analysis is that if someone were considering purchasing an annuity, they should look at the option of delaying SS as a way of buying one of the best annuities on the market. If you are in favor of recommending that a retiree take a chunk of their retirement savings to purchase a commercial annuity, you should understand that using funds to bridge to SS is the same thing, except you are getting a better, inflation adjusted annuity."
- Rick Connor
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The Opposite of HumbleDollar

"Good lord, how rude. The thing is Dick, she's may have the one who couldn't afford to shop there."
- Dan Smith
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Tasting Retirement

I'M TRYING MY HAND at retirement. It isn’t going so well. As a teenager and when I was in my early 20s, I would take to the couch and happily spend the day consuming a novel. Could I do that at age 62? It seems not. At some point over the past four decades, I lost the ability to do things solely for my own enjoyment. It seems the endless demands of work, family and household chores have crushed my inner self-absorbed teenager. Am I missing out? I’m not sure. Sleeping in. This is relative. Before my diagnosis, I’d regularly get up at 5 a.m. Today, I’ll often stay in bed past 6. This is partly a conscious attempt to sleep more and partly because my body needs more sleep. My cancer, coupled with my treatment, can leave me feeling pretty fatigued. Still, after decades of getting seven hours of sleep a night and often less, it feels like a great luxury to linger longer in bed. This is one part of my “retirement” that I’ve successfully embraced. Travel. Since my diagnosis 11 months ago, Elaine and I have visited Ireland (twice), London and Paris, gone on a cruise, taken the kids and their families for a long weekend at a luxury resort, and made a number of shorter trips to places nearby. Many dollars have been spent. Has it been worth it? Some of the trips have been great. Others have been more of a struggle. Since late October, my mobility has been all over the map, a result of the cancer spreading to my spine. At its worst, I could barely walk a city block. After radiation treatment, I can almost feel like my old self, and have no problem walking. Even then, fatigue is an issue, and it’s especially bad when coupled with the changing time zones that accompany transatlantic trips. Before my diagnosis, Elaine and I had a wish list of places we wanted to visit, perhaps staying for weeks at a time. But those travel dreams have been largely nixed. It’s been tough for me to leave town for more than a week or so, given my endless medical appointments. All this is a reminder of what I’ve often read from HumbleDollar commenters, which is that retirees should travel while they can, because you never know when deteriorating health might steal that from you. Television. I’m ambivalent about TV, inclined to view it as a passive activity that usually isn’t worth the time invested. Still, in recent months, I’ve started to watch sports on TV every so often, something I stopped doing more than 25 years ago. Elaine and I also occasionally watch an episode of our latest TV series during the middle of the day, which feels like the height of decadence. I may even pay to stream July’s Tour de France, though I’m not sure I want to commit the necessary hours to take full advantage. Family. With my diagnosis, my family—my two kids, my mother, my three siblings—have rallied around me. We speak more often on the phone and see each other more frequently. If there’s an upside to my illness, this is it. Still, I’m not sure all of the above amounts to much of a retirement. Don’t I have any hobbies, you might wonder? I did—bicycling—and I imagined retirement would give me the chance to explore the Pennsylvania countryside on two wheels. But because I've had balance issues, the doctors ordered me to stop riding outside when I got my diagnosis, so the only cycling I do these days is in the basement. Any other hobbies? The problem, and I’m not sure it is one, is that my hobby is my work. I no longer spend my days editing articles for HumbleDollar. Those edited articles have been replaced by the pieces that the site’s readers post directly to the Forum. But while I’m no longer editing, I still devote part of each day to various writing projects and to monitoring activity on HumbleDollar. I enjoy it, and I think it’s a worthy use of my time. But I’m not sure others would consider what I do each day to be anything akin to retirement. Is there a lesson here? Perhaps. While HumbleDollar might be a community united by a desire to discuss financial issues in a civil and intelligent manner, the debates within the Forum highlight readers’ many differences. Among them: the virtues of budgeting, the wisdom of investing abroad, when to claim Social Security, whether to favor individual bonds over bond funds, how much to travel, the desirability of continuing care retirement communities, whether to buy income annuities, and much more. Similarly, there’s no one definition of retirement, and what makes others happy likely won’t work for you and me. Don’t like the way others are spending their retirement? That’s an easy one: Don’t do what they’re doing. Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier posts. [xyz-ihs snippet="Donate"]
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Bogle has saved us a Trillion Dollars through Vanguard’s 50th Anniversary

"Nick Maggiulli’s article you link to references a book The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions. I have read the introduction to The Bogle Effect and it looks like a book I will enjoy. Thanks for your post John."
- William Perry
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A False Sense of Security

"To illustrate your point about guarantees, I looked at the immediate annuity payments I would receive from the money I have accumulated in my TIAA 403(b) account. Adding a 10 year period certain guarantee would reduce my monthly income by 8.7%, while adding my wife as a joint lifetime survivor would reduce my income by 18.6%. Adding both options would result in a 19.6% reduction so, at least for our ages (75 & 77), it wouldn't cost much to add a 10 year guarantee to a joint annuity."
- parkslope
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Kind Hearts are More than Coronets

"Norman, talking about cancer can be overwhelming. In general, people find it difficult to process, especially with all the devastating complications it brings. i feel most comfortable saying I have good days and bad days whenever the subject comes up. Disease aside, we are still the same people we always were, trying to cope everyday with a disease no one deserves to have. i am not able to pursue the life .i had but I am so grateful for my writing—One of my last pleasures in life; because it suffuses me with more life to reach out to others—granting me the ability to fight for every blessed day."
- Marjorie Kondrack
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Going Against the Grain

"In so far as my parents communicated expectations, it was that I would get a job when I left school. Since I did well in school, instead I became one of the first in my extended family to go to university. My original plan - and it was my own plan - was to teach history. A lot of English school children don't know how lucky they are that I was diverted and wound up a techie. There is one "road not taken" that I think about occasionally: I was offered a job designing databases for the BBC, but instead I stayed with my existing employer and accepted an assignment to the US."
- mytimetotravel
Read more »

Any Crypto Investors?

"Three or four years ago I bought $10 worth of bitcoins just for fun. It dropped to $6.00 and now it’s worth $23.00. No idea what it actually is."
- R Quinn
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You’ve Come a Long Way, Baby by Marjorie Kondrack

"Interesting thoughts, Kevin. I think most people recognize propaganda when they see it. This era was the dawning of women being brought to prominence in business. Companies were combing their human capital for women candidates they could promote to management positions. The ad embraced ” Sell the sizzle, not the steak.” The message to women was— You’ve arrived. Women wanted that recognition. Not the cigarette."
- Marjorie Kondrack
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RDQ Sorry folks, I still see annuities, including deferred annuities, as a viable option for creating steady retirement income.

"FED Data from 2022: Wealth (Total of all assets less liabilities) All Households 192,084 (Median or 50th%tile) Average this cohort 1,059,470 (82.5%tile) Households 65-69 years 393,480 (Median or 50th%tile) Average this cohort 1,836,884 (82%tile) Average all households 1,059,470 (73%tile) Households 70-74 years 438,700 (Median or 50th%tile) Average this cohort 1,714,085 (82%tile) Average all households 1,059,470 (71%tile) In plain English, for all US households, 50% have less than 192,084; and while the "average" household wealth is over a million, 82.5% have less than that. Not surprisingly, wealth is greater for older folks, and the numbers reflect that. Nevertheless, the skewing of wealth towards the top means that over 70% of those higher worth households are still below the US "average" wealth level. These numbers include all assets but exclude the value of pensions and social security benefits. Nevertheless, it illustrates the vital importance social security plays in the security of our nations's citizens."
- Jack Hannam
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You versus Social Security – Quinn is betting against you.

"Which is what it has to do now as the bonds are gradually being redeemed to pay benefits. I assume that cash is coming from new bonds sold elsewhere-debt for debt."
- R Quinn
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Winning the Debt Game by David Powell

"Towards the end of the book of The Best of Jonathan Clements that Jonathan selected to include in this compilation book is my favorite article dated 2/27/15 where Jonathan quotes George Kinder the author of The Seven Stages of Money Maturity and adds his own commentary. The article is titled Three Questions that can Change Your Finances... and Your Life. I will not spoil for you, with my poor attempt to summarize the article, the article which I consider the best of The Best. I hope you choose to read this book and this article. I concur with David's recommendation of this book being the best personal finance book of 2025."
- William Perry
Read more »

Buying an Annuity from the SSA

"I thought my last paragraph covered your comments. I apologize if it wasn't clear. I acknowledged that people in "desperate financial situations" may need to take their benefits as soon as possible, I've spoken to dozens of them over the last 7 years of TaxAide. I also wrote that those who don't need their SS benefits can do whatever they choose. It makes little difference. Like you I have a pension and am glad of it. I have never pushed back on the idea of using annuities to secure guaranteed retirement income. But focusing on the two extremes ignores a large swath of retirees who have both SS and some level of retirement savings. They have to make decisions on how to best generate income. They could likely benefit from an annuity to help secure a safe level of income. The real point of the CRR analysis is that if someone were considering purchasing an annuity, they should look at the option of delaying SS as a way of buying one of the best annuities on the market. If you are in favor of recommending that a retiree take a chunk of their retirement savings to purchase a commercial annuity, you should understand that using funds to bridge to SS is the same thing, except you are getting a better, inflation adjusted annuity."
- Rick Connor
Read more »

The Opposite of HumbleDollar

"Good lord, how rude. The thing is Dick, she's may have the one who couldn't afford to shop there."
- Dan Smith
Read more »

Tasting Retirement

I'M TRYING MY HAND at retirement. It isn’t going so well. As a teenager and when I was in my early 20s, I would take to the couch and happily spend the day consuming a novel. Could I do that at age 62? It seems not. At some point over the past four decades, I lost the ability to do things solely for my own enjoyment. It seems the endless demands of work, family and household chores have crushed my inner self-absorbed teenager. Am I missing out? I’m not sure. Sleeping in. This is relative. Before my diagnosis, I’d regularly get up at 5 a.m. Today, I’ll often stay in bed past 6. This is partly a conscious attempt to sleep more and partly because my body needs more sleep. My cancer, coupled with my treatment, can leave me feeling pretty fatigued. Still, after decades of getting seven hours of sleep a night and often less, it feels like a great luxury to linger longer in bed. This is one part of my “retirement” that I’ve successfully embraced. Travel. Since my diagnosis 11 months ago, Elaine and I have visited Ireland (twice), London and Paris, gone on a cruise, taken the kids and their families for a long weekend at a luxury resort, and made a number of shorter trips to places nearby. Many dollars have been spent. Has it been worth it? Some of the trips have been great. Others have been more of a struggle. Since late October, my mobility has been all over the map, a result of the cancer spreading to my spine. At its worst, I could barely walk a city block. After radiation treatment, I can almost feel like my old self, and have no problem walking. Even then, fatigue is an issue, and it’s especially bad when coupled with the changing time zones that accompany transatlantic trips. Before my diagnosis, Elaine and I had a wish list of places we wanted to visit, perhaps staying for weeks at a time. But those travel dreams have been largely nixed. It’s been tough for me to leave town for more than a week or so, given my endless medical appointments. All this is a reminder of what I’ve often read from HumbleDollar commenters, which is that retirees should travel while they can, because you never know when deteriorating health might steal that from you. Television. I’m ambivalent about TV, inclined to view it as a passive activity that usually isn’t worth the time invested. Still, in recent months, I’ve started to watch sports on TV every so often, something I stopped doing more than 25 years ago. Elaine and I also occasionally watch an episode of our latest TV series during the middle of the day, which feels like the height of decadence. I may even pay to stream July’s Tour de France, though I’m not sure I want to commit the necessary hours to take full advantage. Family. With my diagnosis, my family—my two kids, my mother, my three siblings—have rallied around me. We speak more often on the phone and see each other more frequently. If there’s an upside to my illness, this is it. Still, I’m not sure all of the above amounts to much of a retirement. Don’t I have any hobbies, you might wonder? I did—bicycling—and I imagined retirement would give me the chance to explore the Pennsylvania countryside on two wheels. But because I've had balance issues, the doctors ordered me to stop riding outside when I got my diagnosis, so the only cycling I do these days is in the basement. Any other hobbies? The problem, and I’m not sure it is one, is that my hobby is my work. I no longer spend my days editing articles for HumbleDollar. Those edited articles have been replaced by the pieces that the site’s readers post directly to the Forum. But while I’m no longer editing, I still devote part of each day to various writing projects and to monitoring activity on HumbleDollar. I enjoy it, and I think it’s a worthy use of my time. But I’m not sure others would consider what I do each day to be anything akin to retirement. Is there a lesson here? Perhaps. While HumbleDollar might be a community united by a desire to discuss financial issues in a civil and intelligent manner, the debates within the Forum highlight readers’ many differences. Among them: the virtues of budgeting, the wisdom of investing abroad, when to claim Social Security, whether to favor individual bonds over bond funds, how much to travel, the desirability of continuing care retirement communities, whether to buy income annuities, and much more. Similarly, there’s no one definition of retirement, and what makes others happy likely won’t work for you and me. Don’t like the way others are spending their retirement? That’s an easy one: Don’t do what they’re doing. Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier posts. [xyz-ihs snippet="Donate"]
Read more »

Bogle has saved us a Trillion Dollars through Vanguard’s 50th Anniversary

"Nick Maggiulli’s article you link to references a book The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions. I have read the introduction to The Bogle Effect and it looks like a book I will enjoy. Thanks for your post John."
- William Perry
Read more »

A False Sense of Security

"To illustrate your point about guarantees, I looked at the immediate annuity payments I would receive from the money I have accumulated in my TIAA 403(b) account. Adding a 10 year period certain guarantee would reduce my monthly income by 8.7%, while adding my wife as a joint lifetime survivor would reduce my income by 18.6%. Adding both options would result in a 19.6% reduction so, at least for our ages (75 & 77), it wouldn't cost much to add a 10 year guarantee to a joint annuity."
- parkslope
Read more »

Kind Hearts are More than Coronets

"Norman, talking about cancer can be overwhelming. In general, people find it difficult to process, especially with all the devastating complications it brings. i feel most comfortable saying I have good days and bad days whenever the subject comes up. Disease aside, we are still the same people we always were, trying to cope everyday with a disease no one deserves to have. i am not able to pursue the life .i had but I am so grateful for my writing—One of my last pleasures in life; because it suffuses me with more life to reach out to others—granting me the ability to fight for every blessed day."
- Marjorie Kondrack
Read more »

Going Against the Grain

"In so far as my parents communicated expectations, it was that I would get a job when I left school. Since I did well in school, instead I became one of the first in my extended family to go to university. My original plan - and it was my own plan - was to teach history. A lot of English school children don't know how lucky they are that I was diverted and wound up a techie. There is one "road not taken" that I think about occasionally: I was offered a job designing databases for the BBC, but instead I stayed with my existing employer and accepted an assignment to the US."
- mytimetotravel
Read more »

Any Crypto Investors?

"Three or four years ago I bought $10 worth of bitcoins just for fun. It dropped to $6.00 and now it’s worth $23.00. No idea what it actually is."
- R Quinn
Read more »

Free Newsletter

Get Educated

Manifesto

NO. 2: WE GET one shot at making the financial journey from here to retirement—and failure is not an option, so we should save like crazy, avoid big investment bets and insure against major risks.

think

NEGATIVE BONDS. When we buy bonds, we lend to others and receive interest in return. Borrowing can be seen as a negative bond: Others lend to us—and we pay them interest. Typically, the interest rate we pay on borrowed money is higher than the yield we can earn by buying bonds. The upshot: Paying down debt is often the smartest “bond” we can buy.

humans

NO. 2: WE FOCUS on today—and shortchange tomorrow. Our nomadic ancestors didn’t worry about the long term. Instead, they focused on surviving today, which meant consuming as much as they could whenever they could. Those instincts live on within us, driving our spending, saving and investing behavior—and causing long-term financial damage.

act

CHECK YOUR retirement readiness. Try the simple calculators from AARP and Vanguard Group. Neither requires you to create an account. Each will give you a somewhat different assessment—a reminder that such projections are a rough-and-ready business. Still, you should get a sense for whether you're on track for a comfortable retirement or off the rails.

Money Guide

Homestead Exemption

THE PHRASE "homestead exemption" occasionally refers to a break on property taxes that’s available in some states. But at issue here is something quite different: In some states, you can’t be forced to sell your home to satisfy the demands of creditors. In states such as Alaska, Colorado and New Mexico, the amount of protection is capped at a relatively modest level. But in other states, such as Florida, Iowa, Kansas, South Dakota and Texas, the protection is quite broad. A homestead exemption may help if you lose a lawsuit, have nonmortgage debt or file for bankruptcy. But it only applies to your primary residence, not a second home. Moreover, it probably won’t help you if you default on your mortgage or owe taxes. Don’t live in a state with a robust homestead exemption? You might see if you and your spouse can title your home and other assets as “tenancy by the entirety.” This form of ownership is only available to married couples and only in some states. What’s the advantage of tenancy by the entirety? You can’t transfer your ownership stake without the consent of your spouse. That could prevent a forced sale of your home if one of you loses a lawsuit. It won’t, however, help if you are both sued. Next: Umbrella Insurance Previous: Retirement Accounts
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Manifesto

NO. 2: WE GET one shot at making the financial journey from here to retirement—and failure is not an option, so we should save like crazy, avoid big investment bets and insure against major risks.

Spotlight: Abuse

Playing Defense

THE LETTER WAS IN a mountain of mail delivered the day after my wife and I returned from holiday. “Dear David Powell, Thank you for your recent application for a Bed Bath & Beyond Mastercard account. Your request… was carefully considered, and we did not approve your application….”
I’ve never been happier to receive a rejection.
We use exactly one credit card, pay it off each month and have never applied for another. This fraudulent application,

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Copycat Crime

I WAS SITTING AT MY computer one lunchtime when an email popped up from one of my credit card companies, saying I’d just purchased nearly $12,000 of jewelry at a store in Toronto. Within minutes, I was on the phone to the card company.
I was quickly referred to the fraud unit. I told my story. The company credited my account, cancelled the card and mailed me replacements. Weeks later, I had to complete a form,

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Keeping It Private

WHILE SITTING AT MY desk a few months ago, I received a text message from Citibank notifying me of “suspicious activity” on my primary credit card. I immediately logged onto my account and discovered someone that morning had attempted to use my credit card number at a luxury resort—one located several hundred miles from where I work. The charge had been denied, but the damage was done. I immediately cancelled the card. I also began notifying the companies I have automated payments with,

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Lost Property

OUR COMMUNITY HAS a Facebook-like online forum called Nextdoor. I tend to ignore the posts, which usually involve things like items for sale and new restaurant openings. But a recent post caught my eye—because it was from the Montgomery County Recorder of Deeds.
The article said Pennsylvania’s Attorney General had initiated a lawsuit against a realty company for deceptive practices targeting elderly, low-income and minority homeowners. The realty company was offering a “Homeowner Benefit Program” that gives homeowners anywhere from $400 to $1,000 upfront to lock into a contract.

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Staying Safe

FOLKS FORGET passwords every day, an inconvenience that can usually be quickly fixed—but not always.
In January, The New York Times wrote about a German programmer living in San Francisco. A decade ago, he had been paid 7,002 bitcoins for making a video explaining how cryptocurrencies work. He stored them in a digital wallet on a hard drive and wrote the password on a piece of paper, which he has since lost.

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An Ode to Owing

A MEDIA-SAVVY IRS often announces that one of its top priorities is combatting criminals who steal tax-related information. The good news: Reports of tax identity theft have declined markedly in recent years. The bad news: Resourceful identity thieves remain active and constantly introduce new schemes.
One consistently remunerative ploy is to use stolen Social Security numbers and other information to file fraudulent tax returns that claim hefty refunds—claims that generally are submitted at the start of the filing season.

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Spotlight: Ehart

Bad News Bonds

EXPERTS HAVE LATELY been recommending that investors shift some money from short-term bonds—which offer the highest yield these days—to longer-term issues, whose prices are more sensitive to interest rates. Had I followed this advice—and I almost did—I’d have quickly lost money in what’s supposed to be the safe part of my portfolio. Bonds did indeed rally from their October 2022 lows, but have pulled back since early May. Vanguard Intermediate-Term Treasury ETF (symbol: VGIT) was down 4.2% from its May 4 peak through last Friday, while iShares 20+ Year Treasury Bond ETF (TLT) was off 8.8% during that stretch. The “smart money” said prepare to profit if interest rates fall, perhaps because the economy slips into a recession. But that’s a big “if.” The flipside: You lose if rates rise. That’s why I’ve generally preferred short-term Treasurys in my portfolio. That limits my exposure to interest-rate fluctuations and provides a hedge against the risk of falling stock prices. Short-term Treasury prices won’t decline much if rates keep rising, though they also won’t gain much if rates fall from here. An added bonus: Today, we’re enjoying generous yields on short-term bonds and cash investments, including some guaranteed by the federal government. Indeed, those high rates have lately drawn me to money market funds and certificates of deposit (CDs). The bond market got a bad case of the willies in August, burning those who hold interest-sensitive assets. Now, Wall Street is gripped by the fear of rising rates. Budget deficits and the national debt really do matter—finally—or so some are saying. On top of that, the U.S. Treasury must issue a lot of new debt at higher rates, while foreign countries are reducing their Treasury holdings. Prepare for interest rates to be “higher for longer,” some experts are predicting. I prefer not to bet on the direction of interest rates—and I don’t have to. Unlike the stock market, where declines have reliably been followed by greater gains because of growing earnings and dividends, there’s no such natural tendency in the bond market. Yes, higher interest rates lure more buyers, but rates could potentially rise indefinitely. Until 2022, bond and stock investors, as well as homeowners, had enjoyed 40 years of generally falling rates. Who’s to say that trend couldn’t reverse in the decades ahead, and so why take interest-rate risk? I have a young advisor at Fidelity Investments who had better advice for my situation than the high mucky mucks at other big asset-management firms. He had thoughtfully set up a meeting with me ahead of the Aug. 31 maturing of a Treasury note I bought last year. He said Fidelity shared the consensus view that interest rates will fall in 2024. But knowing we were talking about my emergency money, his recommendation wasn’t to take interest rate risk, but rather to focus on avoiding reinvestment risk—the danger that rates will be lower when I go to reinvest the money from, say, a maturing bond. He suggested buying a noncallable three- or five-year CD at 5.1%. That way, if rates decline, I don’t have to worry about where to reinvest my cash: I’ve locked in good rates for a few years to come. Problem is, I can’t commit to tying up any money for three-plus years. I need more liquidity in my emergency fund. I can tie some up for perhaps a year or 18 months. Of course, if rates keep rising, I’d be better off in a money market fund. Last year, I bought that Treasury note with what seemed like a great yield, but it’s now low by today’s standards. I’ve settled on a plan to gradually purchase CDs between now and year-end to create what’s known as a CD ladder. That is, the CDs will mature at staggered dates, stretching from June 30, 2024, through Sept. 30, 2025. Every three months starting in mid-2024, I’ll get cash I can reinvest or spend if needed, such as if I lose my job or to pay for my daughter’s wedding. I recently bought a noncallable CD yielding 5.25% through Sept. 4 of next year. In a month, I’ll look for one maturing in December 2024, then March 2025 and so on. Moving gradually eases my mind about the possibility that rates could be even more generous in the near future. The lesson I’ve learned from the whole experience: Tune out tactical investment advice—and just be happy when yields in your emergency fund are beating inflation. William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles. [xyz-ihs snippet="Donate"]
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Cheapskates Win

NEW MORNINGSTAR research on bond funds echoes what the late Jack Bogle preached—and proved—for decades: Costs are the greatest predictor of fund performance, not stock or bond selection prowess. In investing, you get what you don’t pay for, said Bogle, Vanguard Group’s founder and creator of the first index mutual fund. There’s a school of thought that claims it’s easier for active bond fund managers to beat their indexes than it is for their stock fund colleagues. Whether that’s true or not, the fact remains that funds with lower expense ratios outperform more expensive ones, and they do so with less volatility. Those are the findings of Morningstar’s Chief Ratings Officer, Jeffrey Ptak, relayed in a recent column titled, “Why Pay Up for Bond Funds?” “Costlier bond funds not only return less than cheaper funds, on average, but they’re more volatile,” Ptak wrote. “That’s not a coincidence. For even among funds of the same type, pricier offerings are more likely to take on higher risk to clear the higher fee hurdles they face.” Upon reading that, my thoughts turned to today’s “bond king,” Jeff Gundlach. Several years ago, I considered investing in his flagship DoubleLine Total Return Bond Fund (symbol: DLTNX), but I was dissuaded by the fund’s high expense ratio, which today is 0.73%. Especially when bond yields in the 2010s were so low, I couldn’t justify paying that much for fixed-income exposure. It’s also important to consider the purpose of fixed-income holdings in your portfolio. Since I’m still working and have a high percentage of my investments in stocks, I view Treasurys as the best way to hedge that risk. I use Treasury bond index funds as opposed to alternatives such as the Vanguard Total Bond Market Index Fund’s Admiral Shares (VBTLX). Vanguard’s Total Bond fund tracks an index that includes all types of investment-grade bonds, with roughly half in Treasurys, but with corporates and securitized bonds also owned. Gundlach and his team, by contrast, invest the vast majority of their fund’s assets in securitized mortgage bonds. That presents a different risk profile but offers a higher yield. [xyz-ihs snippet="Mobile-Subscribe"] DoubleLine Total Return sports a trailing 12-month yield of 3.66%, according to Morningstar, versus just 2.66% for Vanguard’s Total Bond Market fund. Its yield advantage is even greater over my short-term Treasury fund. Yet I don’t need yield right now, nor do I need the higher interest-rate risk of these other funds. Despite vastly higher costs, Gundlach’s fund has destroyed the index fund since the former’s inception just over 13 years ago. DoubleLine Total Return has returned 3.5% per year, versus 2.2% for Vanguard Total Bond. Yet all that outperformance was concentrated in the DoubleLine fund’s early years, before it attracted most of its current $34 billion in assets. Over the 10 years ended May 31, DoubleLine Total Return, with an annual gain of 1.2%, has lagged behind Vanguard Total Bond’s 1.4% annual return. Paying DoubleLine nearly three-quarters of a percentage point every year cost investors money over the past decade. Vanguard Total Bond’s expense ratio is just 0.05%. Unlike most of the high-cost funds in the recent Morningstar study, the DoubleLine fund exhibited less volatility than the bond index fund. The DoubleLine fund fell just over 16% in the recent bond bear market, versus nearly 18% for Vanguard’s bond index fund. That’s good, yet hardly enough to let investors sleep more soundly—or to justify the higher costs. And most active bond fund managers can’t match Gundlach’s record. The bottom line: I’d think twice before investing in any high-cost fund. Management skill rarely compensates investors. The only certainty is that high fees handsomely compensate management. William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles. [xyz-ihs snippet="Donate"]
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Different This Time

I’M DETERMINED NOT to repeat my mistakes of 2008-09. I was ruined by that financial crisis or, more accurately, I let it ruin me. I led into it with my chin. I’ll spare you the details of my personal situation in the years leading up to the crash, but the upshot is I was egotistical, financially reckless and looking for a big score. As the crisis unfolded, I piled risk upon risk, mistake upon mistake. I bought 2008 all the way down, loading up on many of the beaten-down financial names: Goldman Sachs, Morgan Stanley and even Lehman Brothers. Unfortunately, I purchased Goldman and Morgan Stanley with borrowed money, using my margin account. I had been using such leverage for years—within prudent limits, I thought. I calculated potential downsides but, of course, it was the potential gains that seized my imagination. The hard lesson for me? It wasn’t that margin investors can be forced to sell stocks in bear markets, particularly the worst and most sudden ones, leaving them no means to buy back in. I knew that. What I didn’t know is that brokerage firms can decide overnight that some securities are no longer marginable and hence they don’t count as collateral. E*Trade said I couldn’t borrow against my Goldman and Morgan Stanley shares anymore. I was forced to sell. Probably less than two months before the low. Then I was laid off at the end of 2009 and missed about a year of potential 401(k) contributions as the market recovered. I entered 2020 much poorer for my folly. But I have no debt today. The car is paid off and has many miles left on it. My big risk is getting laid off again—unfortunately, a real possibility, as it is for so many. But unlike 2008, I’m not picking the hardest-hit stocks and trying to beat the market. I’m not hanging on the words of CNBC celebrities. My investments, largely in target-date retirement funds, are a mix of stocks and bonds appropriate for my age. I have targets for my exposure to U.S. shares, foreign stocks and bonds, and rules for rebalancing to stay near those targets. How am I handling the fastest bear in history? So far, I can only grade myself a B, with a B+ for planning and preparedness, but a C+ for execution. Why? I got emotional. I entered a perfectly well-reasoned buy order on Friday, March 13, with the market down 25% from its high, as I said I likely would. That was my first buy order of this downturn. But mutual fund trades don’t settle until the close. Not only did I end up buying after the “Trump bump” late that day, but the bump slumped all the way back down the following Monday, March 16. I’d unintentionally bought higher than I wanted, only to see prices immediately tumble. I said I wouldn't get upset, but I was. I wasn’t going to let that happen again. My two subsequent moves were rushed, even though they were limited and kept my stock exposure within target. I also made a modest trade on March 16 in my mother’s account, selling a tax-exempt bond fund for the Vanguard Total World Stock Index ETF. With my “Trump bump” experience in my mind, I insisted to her financial advisor that we buy the exchange-traded fund, not the regular mutual fund version. I wanted that price, that minute. No need to call me back. Just buy it. In fairness to me, Mom’s stock exposure remains reasonable and she might benefit from a bit more foreign diversification. You’ve heard the cliché about fear and greed. But one component of greed is Fear of Missing Out and, last week, I caught FOMO like a virus. Mom and I were almost immediately underwater on all three trades, though yesterday's big rally undid a lot of the damage. But such short-term losses aren't a big problem or surprise. I know it’s not about buying at the bottom, it’s about buying when the market gives you opportunities. And 25% to 30% off the high is a good opportunity, just not necessarily the bottom. Maybe I should add a time element to my rebalancing plan. Last week, a smart investment advisor told me that he rebalances client portfolios when their allocations get too far out of established ranges, but that he only considers such rebalancing once a month. Similarly, a Vanguard Group wealth management executive told me they generally rebalance client portfolios quarterly, though they'll move between periods if portfolios get too far out of whack. There’s discipline in that. A discipline that tames the FOMO virus. Markets may be higher or lower by the end of this month or the next or the one after that. There’s no way to know. But when you’re in the throes of FOMO, you are thinking markets are more likely to rise than fall in the near term. And none of us has any business making assumptions like that, any more than we should sell because our gut tells us markets are heading lower before they head higher. The market being the cruel beast that it is, I suspect that until FOMO gets beaten out of me, the lower we go. So I need to slow my roll, but not make the opposite mistake of being afraid to buy when called for under my plan. Am I beating myself up too much for rushing some trades? Maybe. I’m still prudently invested. Unless I lose my job for an extended period, I won’t be forced to sell, like I was 11 years ago. This pandemic is a horrible tragedy, as well as a financial and economic crisis, unlike anything we’ve ever seen. But we have a responsibility to invest wisely and opportunistically. In wealth management terms, this almost certainly is a great buying opportunity. This time, I want to be able to tell my family that I bought. William Ehart is a journalist in the Washington, D.C., area. Bill's previous articles for HumbleDollar include Luck of the Irish, No Sweat and Resolve to Rebalance. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart. [xyz-ihs snippet="Donate"]
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Mild Salsa

BALANCED FUNDS ARE a great first investment for those with a moderate risk tolerance. But which fund? Vanguard Balanced Index Fund Admiral Shares, with its incredibly low 0.07% expense ratio, $3,000 investment minimum and mix of 60% stocks and 40% bonds, is the standard by which all balanced funds should be judged—and it’s likely your best choice. But if it isn’t one of your 401(k) options, chances are you’ll find the plan includes one or more of the other five funds in the accompanying chart. They’re the largest and arguably the most successful balanced funds and, together with Vanguard Balanced Index Fund, are among the 10 biggest in the 401(k) market. They’re also good choices. These longstanding brand names don’t have the buzz of bitcoin or smart beta ETFs. But they continue to deliver generally consistent, solid results. Their average age is 62 years. Through many management changes and many market crises, their parent companies have kept them largely on track. Most balanced funds are actively managed. That means that, since the Vanguard index fund’s inception in 1992, they have tried to beat it, rather than match it—a difficult feat, but one that two of the five actively managed funds in the chart have accomplished over the past 15 years, while the other three weren't far behind. These were also the five largest balanced funds 15 years ago—and they’ve lived up to their reputations. Each has its own distinctive appeal. Whereas Vanguard Balanced Index Fund offers exposure to the entire U.S. stock market and only investment-grade bonds, some of the active funds have juiced returns with lower-quality bonds, including junk bonds. Fidelity Puritan currently has the lowest-quality bond rating of the group, at the last rung of investment grade, according to Morningstar. The index fund’s top-quality bonds will hold up better in bad times. The higher expense ratios of the active funds can incentivize them to increase risk, with an eye to boosting returns and thereby overcoming the drag from their higher annual expenses. Most of the actively managed balanced funds have more of a large-company investment focus than the index fund does. Some use a growth style, others value and some have significant foreign exposure, which has detracted from returns over the past 15 years. Undoubtedly, each has had ups and downs of its own making. Dodge & Cox Balanced stumbled badly during the financial crisis, thanks to its heavy stake in financial stocks. And portfolio manager changes are a source of uncertainty. In fact, Fidelity Puritan recently lost its lead fund manager and, next year, Vanguard Wellington will lose one of its lead managers, both because of retirement. Morningstar has cut its rating of Puritan to neutral, pending evaluation of new management, but has expressed more confidence in Wellington’s remaining team. With all that, there’s a lot to recommend all six funds. Here are five reasons to consider buying a balanced fund: The 60% stock-40% bond split, which is what these funds typically maintain, is ideal for moderate risk investors. It’s like mild salsa. In fact, it’s the industry standard for moderation: mostly stocks, to tap into the potential growth we need, but a hefty slug of bonds to limit volatility. Most investors below their 50s are advised to go heavier on stocks. But it’s also crucial to stay within your risk tolerance. That’s especially true for less-experienced investors. While target-date retirement funds are also great choices for set-it-and-forget-it investors, they’re a different animal. The allocation to stocks declines over time, plus they often have substantial foreign exposure. With a balanced fund, you have a better idea of what you’re getting. Even the best advice—about low-cost indexing, broad diversification, astute asset allocation, periodic rebalancing—can be a blur for beginning investors. The great investment books sometimes contradict each other on crucial issues, such as how much to invest overseas. As in other areas of our lives, we shouldn’t let the perfect be the enemy of the good. A lot of people have made a lot of money in balanced funds without knowing anything about asset class correlations or the price of shares in China. Your 401(k) choices may be limited—but there’s a good chance one of these funds is in there. The American Balanced Fund, normally available only through financial advisors for a heavy cost, may be available without a commission in your 401(k). I think of my mother, sitting in funds like Vanguard Wellington and American Balanced, and reinvesting her dividends and capital gains for decades. Her financial advisor was happy with such a low-maintenance client. What did Mom know about investing? Not much, except to buy and hold her balanced funds. Mom slept soundly, while I tossed and turned, worrying about whether my asset allocation was the right one. William Ehart is a journalist in the Washington, D.C., area. Bill's previous articles include Weight Problem, Not My Guru and China Syndrome. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart. [xyz-ihs snippet="Donate"]
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Retirement

Mixed Bag

MY LAST BLOG POST—about value-oriented Dodge & Cox Stock Fund—got me looking at the long-term returns for some highly touted large- and mid-cap growth and blend funds from 15 years ago. My surprise: Of the 15 funds in my admittedly unscientific sample, six went on to outpace both the S&P 500 and an index fund focused on the same market segment. The six winners are boldfaced in the accompanying table. Note: For two of the winners, Jensen Quality Growth and Vanguard Primecap, I used the S&P 500 as their style benchmark. The reason: Like the S&P 500, they have a blended investment style, rather than being pure growth funds. I believe it’s important to judge funds not only against a comparable style index, but also against a broad market index, such as the S&P 500 or Wilshire 5000. Why? An investor needn’t necessarily own, say, growth or value funds, or have extra small- or mid-cap exposure. That decision is on the investor. Think of it this way: When you invest in a style-specific actively managed fund, you’re certainly hoping to beat the broad market over the long haul. Otherwise, what’s the point? For my 15 celebrated funds from 2006, the range of outcomes has been quite broad. If you’d bought one of the 15, you had a 40% chance of picking a winner—meaning the fund beat both the S&P 500 and a comparable style index—and a 27% chance of ending up with a disappointingly bad loser. (Guess who bit on one of the losers at around that time? Ahem.) Interestingly, your odds of good results were much better if you stuck with the big, established fund firms. Lesson: The volatile gunslingers who occasionally shoot the lights out, like Ken Heebner who still runs CGM Focus, can be hazardous to your wealth. (Ahem, lesson learned.) Despite the success of six of the 15 funds, the experiment still illustrates indexing’s appeal. Four of the 15 funds were especially lackluster. One—the Bridgeway fund—was merged into a similar fund that also performed poorly. Others abruptly changed investment strategy, which happened at FPA Perennial, now named the FPA U.S. Core Equity Fund. That change in strategy saddled shareholders with a huge capital gains liability in 2015. Then there’s the issue of manager tenure. You might find the right manager at the wrong time in their career. Case in point: After a great 28-year run, T. Rowe Price Blue Chip Growth manager Larry Puglia will retire at year-end. How much longer will Brian Berghuis of T. Rowe Price Mid-Cap Growth (tenure: 29 years), Steven Wymer of Fidelity Growth (25 years) and Fidelity Blue Chip Growth skipper Sonu Kalra (12 years) run their funds? That’s the tough question that both existing and potential investors need to ask themselves.
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